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Chinese speculators boost gold rally

by SuperiorInvest

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Chinese speculators' huge bets on rising gold prices have helped drive the precious metal's rally to a record high this month, in a sign that Asian traders are starting to eclipse their Western counterparts in their influence. in the bullion market.

Long gold positions held by futures traders on the Shanghai Futures Exchange (SHFE) increased to 295,233 contracts, equivalent to 295 tonnes of gold. This marks a nearly 50 percent increase since late September, before geopolitical tensions erupted in the Middle East.

A record bullish position of 324,857 contracts was reached earlier this month, according to Bloomberg data dating back to 2015.

One trading firm, Zhongcai Futures, has built up a bullish position in SHFE gold futures equivalent to just over 50 tons of the metal, worth nearly $4 billion and equivalent to more than 2 percent of gold reserves. Chinese central bank bullion.

Gold volumes on the SHFE surged to more than five times last year's average to 1.3 million lots on last week's peak trading day, a trading frenzy that analysts say helps explain the ferocity. of gold's record rally to surpass $2,400 a troy ounce this month. .

SHFE Long Open Interest Line Chart (Contracts in Thousands) Showing Chinese Funds Powering Gold Rally

“Chinese speculators have really grabbed gold by the throat,” said John Reade, chief market strategist at the World Gold Council, an industry body.

“Emerging markets have been the largest end consumers for decades, but have been unable to exert pricing power due to fast money in the West. “We are now reaching the stage where hot money in emerging markets can exert pricing power.”

Gold has risen more than 40 percent since November 2022, supported by record bullion purchases by emerging market central banks looking to diversify their reserves away from the US dollar and signs of high interest rates.

The metal, which is often used as a hedge against inflation and currency depreciation, has been further boosted by its safe haven status since the outbreak of the Israel-Gaza conflict in October, reaching an all-time high of 2,431. dollars per troy ounce last week. .

SHFE Trading Volume (mn) Line Chart Showing Explosion of Gold Trading Activity in China

Still, the magnitude of the rally has surprised many analysts, who point out that the rise is at odds with outflows from exchange-traded funds in the United States and Europe.

Instead, some point to activity on the SHFE and Shanghai Gold Exchange (where trading volumes for a key contract have doubled in March and April compared to last year) as a big driver of the rally, as Chinese investors seek to diversify from their crisis. overwhelmed real estate sector and a stock market in free fall.

Zhongcai, founded three decades ago by Bian Ximing as a PVC pipe maker before expanding into futures trading, is foremost among a group of Chinese trading firms whose big bets have been linked to gold's rapid rise and subsequent retreat since record levels.

$ per troy ounce line chart showing gold soaring to record level

“Short-term traders in leveraged futures markets, as we have seen many times over the years, can drive the price up or down quickly,” Reade said.

Gold prices fell sharply on Monday and were trading at $2,326 per troy ounce on Tuesday.

Other Chinese traders, such as Citic Futures and Guotai Junan Futures, also have large long positions in SHFE gold futures.

Bian, known for his “self-reflection” blogs, is a minority investor in Alibaba Pictures, the Chinese media group behind Green BookOscar winner 1917 and some of the recent Mission Impossible films.

He wrote in 2022 that high inflation and war in Ukraine meant “the time is right to lock up the fund's entire position in highly leveraged gold traded in Shanghai.”

A fund managed by Zhongcai posted a return of more than 160 percent in 2024, according to Wind, a Chinese financial information provider.

Zhongcai and Bian did not respond to requests for comment.

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