Thursday, December 1, 2016

The difference between London paper price and Shanghai physical price now expanded to $32

As the dollar continues to stay above 101 on the index, the spot price of gold continues to get crushed in the Western paper markets.  In fact, ever since Nov. 9 when Donald Trump was declared to become the next President of the United States, gold has fallen over $200 despite increased demand in places like India, Russia, and Vietnam.

But starting back in April, London was no longer the only entity setting a daily price 'fix' for gold as the Shanghai Gold Exchange officially began its own price fix earlier this year to manage the trading of the precious metal during periods when both Europe and the U.S. were closed.

And for the rest of spring and well into summer, the spread between the two markets stayed relatively the same, with the London fix and the Shanghai fix only diverging by perhaps a dollar or two on any given day.  But over the past three weeks this has now changed as the spread between the Western paper market and the Eastern physical one has climbed to a massive $32 difference in the fix price.




Shanghai PM Gold Fix - Dec. 1, 2016


London AM Gold Fix - Dec. 1, 2016


As you can see from the price, the spread has now reached just under $32 per ounce difference.

If the spread continues to widen even further then it will open up two potentially lethal events for the LBMA and the COMEX.  First, it will cause miners who normally sell their gold production through these commodity exchanges to instead find it much more profitable to ship their metal to China and sell it on the SGE.  And secondly, the potential for a massive arbitrage will come into play where one or more big investors will buy up all the gold futures contracts and demand physical delivery at the lower paper price, which they will then sell their gold over in China and pocket the difference as profit.

For decades now the Western gold futures markets have been a vehicle in which central banks and the U.S. Treasury have manipulated gold prices in a scheme used to protect the dollar, especially during this era of massive money printing and zero percent interest rates.  But now that China has taken over as the world's largest physical gold market, more and more they are coming to set their own price for the metal, and it should not be too long before they officially wrest that authority away from both London and New York.

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