Good Afternoon. This post is for those who want an explanation of the phenomenon from someone who lived, breathed, and studied it.1
Note: If you are a premium subscriber, a follow-along transcript is attached as well. It is very helpful for fast forwarding and rewinding
Bonus: GS just released a bunch of macro commodity reports. We got a couple for you. Enjoy
Why are China’s Gold Prices Surging compared to US/Comex?
There continues to be much debate and discussion surrounding the price spread between Shanghai and Comex. Shanghai continues to trade at a premium to the Comex price in both Gold and Silver.
THE ISSUE
The issue for us has been resolved the first day it started2. But for some it has not been. The debate basically breaks along the following lines:
“The Shanghai price of Gold is more representative of global prices now”
versus…
“China is manipulating the price of gold higher domestically and trying to weaponize it against the dollar.”
THE DIVIDE
Sadly many of these debates break largely, but not always, along ideological (Communism vs Democracy) lines.
Some of these debates also break along the lines of people talking their positional biases (long dollar, short dollar, whatever).
Still more debates break along economic theory like Austrian and Neo-keynesian
The problem with these divisions is the people who listen in trying to learn something are sometimes forced to “take sides” or make decisions that divide opinions from smart economic decisions.
THE ASK
We hope to help. As arbitrageurs, it was our job to identify price differences (Gold, Silver, Nat Gas, Oil, Options), why they exist, and profit from them as long as they persisted.
As students of markets, its our pleasure to share this information with people who want to get a better handle on things.
As Capitalists, we want to be paid for that info. The reason the price is cheap is because we love doing this.
What is the real price of Gold?
The main question running under this whole conversation is:
What is the real price of Gold?
While we do not put a particular price target on it, we tell you without hesitation or doubt that the pricing power of Gold in the West, is now moving East. Which means higher than Comex.
Secondary questions addressed:
Is China doing this on purpose or not?
Is this permanent?
Why isn’t it being arbitraged away?
Is China weaponizing Gold?
Topics discussed in this short podcast::
The history of price disparity between exchanges and how it resolved
China and how it uses capital controls to manage FX flows
Why current controls make it harder to Get gold imported into China
The unintended consequences of capital controls on commodity markets
The Chinese historical fear of Yuan uncertainty and its effect on forbidden Gold
The shrinking arbitrage between China and the USA via deglobalization
The shortage of available collateral to guarantee financial arbitrage for intermediate funds to employ.
Mercantilism and the rise of local merchants ability to do physical arbitrage because financial arbitrage is no longer easily done.
China’s policy, unintended or not, shows the price disparity and therefore the bifurcation and new multiparty rising.
Global commodities are still globally accepted, but are now regionally priced
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