Pundit's Perspectives – Wed 1 Jun, 2016

A level headed look at at the China gold fix

So many gold bugs want to point to anything as a potential driver that would “get gold back to its real price”. The recent news of the China gold fix was one of the latest stories people were talking about. While I think it is positive that traders have more avenues to trade gold assuming that a gold fix out of China would make the market “less manpulated” is a stretch…

This post over at the Speculative Investor sums it up perfectly.

Click here to visit the Speculative Investor website for this post and a number of other valuable insights.

Checking on the China ‘gold fix’

On 19th April the Shanghai Gold Exchange (SGE) began quoting a twice-daily gold-price ‘fix’ in Yuan terms. Some pundits claimed that this would give the gold price a large and sustained boost. My view was that beyond short-lived fluctuations driven by the vagaries of speculative sentiment, it was irrelevant*. It was, in my opinion, just another in a long line of distractions from gold’s true fundamental drivers.

I went on to marvel, in a blog post on 26th April, at the inconsistency of those who regularly complain about gold-market manipulation by banks and also cheered the news that the Chinese government and its subservient banks had implemented a “Yuan gold fix”.

Is the manipulation-fixated pro-China camp totally oblivious to what happened over the past 10 years? It would have to be to not realise that modern-day China has been one of the greatest forces for global price distortion the world has ever known. The idea that China could be responsible for honest price discovery for any commodity gives stupid a bad name.

Anyhow, there is no evidence that the gold price is lower than it should be considering this market’s true fundamental price drivers. Of course, to know that this is the case you have to know what the true fundamentals are. You can’t, as many gold commentators do, blindly assume that gold’s fundamentals are always bullish regardless of what’s happening in the world. If you want to be logical you also can’t determine anything useful about the gold price by analysing the shifts in gold from one location to another.

If the implementation of the “Yuan gold fix” had been followed by the price explosion that some promoters were forecasting it would have been a lucky coincidence. As things turned out, the gold price has dropped a little over the past month, which is not surprising considering the fundamentals that matter.

*In a report posted at TSI on 17th April I wrote: “…the Yuan gold fix will have no effect on gold’s true fundamentals and will therefore have no effect on gold’s intermediate-term or long-term price trends. It shouldn’t even have an effect on gold’s short-term price performance, although whether it does or not will largely depend on the vagaries of speculative sentiment.”


Comments:
  1. On June 1, 2016 at 1:12 pm,
    One of the Peters says:

    “The idea that China could be responsible for honest price discovery for any commodity gives stupid a bad name.”

    Truer words could not be spoken.

  2. On June 1, 2016 at 3:21 pm,
    Nigel says:

    Don’t agree, but I would say the gold price chart looks quite sick, I would hold off accumulating at this level

  3. On June 1, 2016 at 5:21 pm,
    Bob Grierson says:

    Hi Cory
    There is a lot of talk of an arbitrage between Shanghai and western exchanges. The idea is that this could result in a bidding war for the physical metal, driving prices higher. Is this just part of the hype or a possibility?
    Bob