What Makes Gold Come Back To $3300 Mark? Goldman Sachs: China

After falling to the range of $3,100 last week, spot gold price has staged another strong rebound this week amid geopolitical tensions in the Middle East and Moody’s downgrade of the US sovereign credit rating. Overnight, the spot gold price has climbed back above the 3,300 mark.

Regarding this, Adam Gillard, an analyst at Goldman Sachs FICC, believes there is a clear logical driver behind this movement: Chinese buying power is making a comeback.

Specifically, gold buying in the Chinese domestic market during the night session of the Shanghai Futures Exchange (SHFE) triggered follow-up buying in the New York Commodity Exchange (COMEX) market. The total open interest in COMEX increased by 3% (silver by 4%), while the arbitrage spread between the two markets, SHFE and COMEX, widened significantly.

Gillard particularly emphasized that although gold prices had previously retreated 8% from their highs, what impressed him was that the scale of gold holdings in the Chinese domestic market remained stable at elevated levels. This indicates behavior different from the usual pattern of domestic momentum traders chasing rallies and selling off declines, as the recent pullback in gold prices did not trigger a large-scale sell-off.

Previously, Chinese customs data released on Tuesday showed that the country's total gold imports in April reached 127.5 tons, hitting an 11-month high. Despite gold prices repeatedly hitting record highs in April, briefly touching $3,500 per ounce, this import figure still surged by 73% compared to March.

Some institutions suggested that the central bank's allocation of new import quotas to certain commercial banks in April may have been a key factor driving the surge in imports.

In this regard, Goldman Sachs pointed out that China's gold imports (excluding central bank purchases) rebounded to a one-year high in April, likely due to arbitrage activities spurred by the pricing advantage of the Shanghai Gold Exchange over the London Bullion Market Association (LBMA).

Notably, physical gold demand has remained strong even as gold prices overall stay elevated. This, to some extent, explains why the premium on gold prices at the Shanghai Gold Exchange has remained firm- despite the current high-price environment in the precious metals market.

In fact, when gold prices surged last month, many market participants noted the leading role of the Chinese market in the gold bull run. Goldman Sachs stated at the time that the new highs and sharp pullbacks in gold prices over the past month "almost all occurred around the opening of the Chinese market." The bank highlighted that capital flows through the Shanghai Gold Exchange and Shanghai Futures Exchange had a more significant impact on gold price movements than futures and options on the New York Commodity Exchange.