Since starting this blog gold bifurcation between physical and paper has gone from theoretical to reality. The only remain question going forward is by how much and how fast. As the post below from Real Asset Co shows, the mechanism is already there. There are to stark differences between two global gold markets: the COMEX in the US and the SGE in Shanghai.
Chinese gold demand, from both individuals and central banks, garnered increasing attention as the gold price rose consistently in the last twelve years. When the gold price declined, many in the West declared the end of gold, but China (along with many other Asian nations) defiantly continued to buy gold and increase their imports.
Questions over the legitimacy and transparency of COMEX and the London Gold markets are now becoming louder, especially as increasing numbers of institutions are keen to know what actually backs those contracts. ‘Paper gold’ is on everyone’s lips.
When it comes to the SGE (Shanghai Gold Exchange), there seems to be little concern over the presence of physical gold, given the increasing volumes of activity in the three largest contracts, two of which are available for immediate delivery. Delivery ratios are significantly higher than those on COMEX, showing the far higher of physical participation in this market.
Via The Real Asset Co.
Whilst the gold price is unlikely to be powered by the SGE, as long as the vast volumes of paper gold exist on both COMEX and London, we do believe that the SGE could end up driving the wedge between the paper gold and physical gold market, and therefore disparities in price between what market participants would deem two different products.
As The Real Asset Company notes, Physical gold demand in the most populated country on earth does not seem to be subsiding, yet neither do COMEX and futures volumes generally.
We believe that as increasing numbers of Westerners look to take delivery of their gold from Western exchanges, there will be more pressure on the physical market. China’s primary physical exchange, as we see from delivery data, is the liquidity hub with the best reputation for such demand.
However anecdotal and media reports show that this is an ongoing phenomenon. Unlike investors in the West, Chinese housewives just want physical gold regardless of the price. This is clearly evident in the delivery data on the SGE, unlike in the West where we see gold as an investment which we hope will climb in price, the Chinese see gold as a way to free up devalued cash and place it into a real store of value.
We are watching a fascinating battle play out between this army of Chinese retail buyers and the specs in the West. The future of the gold price is there for the taking.
Source: The Real Asset Co.
Of course its not just Chinese consumers, as I've mentioned before, the Chinese government has a plan. And it includes buying a lot of gold.