Is China Squeezing The Gold Market?

In response to recent trading price risks, the Shanghai Futures Exchange (SHFE) has implemented transaction limits on gold and copper futures, effective immediately. The move aims to regulate speculation and stabilize market conditions amid increasing volatility.

The daily opening position limit has been capped at 2,800 lots for gold futures and 2,000 lots for copper futures. This decision comes amidst growing concerns over the influence of speculative trading on price movements in these commodities.

However, observers are seeing more than what meets the eye. Eric Yeung on platform X (fka Twitter) said he talked to individuals from China shedding light on the underlying dynamics driving this regulatory action. The Shanghai Gold futures traded at the SHFE primarily represent a paper market, he wrote, while the Shanghai Gold Exchange (SGE) exclusively deals in physical gold. This demarcation underscores the difference between speculative trading and tangible asset transactions.

“The Chinese are imposing transaction limits on the SHFE because they don’t want the paper Gold market dictating a speculative paper Gold price to the SGE physical Gold only market during a [fear of missing out] buying frenzy (of course the two prices are correlated),” he elucidated.

He further noted that by restricting transactions on the SHFE, there may be a shift of liquidity towards the SGE’s physical gold market in the long term. This redirection could stimulate demand for physical gold, bolstering its role in the Chinese market.

On the other hand, with transaction limits in place, it is anticipated that the volume of gold contracts traded on the SHFE will decrease.

The move by Chinese regulators could also lead to an increase in demand for physical gold delivery from Western markets such as COMEX and London.

The most-traded SHFE gold contract soared to a new peak of $77.55 per gram, marking a 16% increase since the beginning of the year. Similarly, the most-traded SHFE copper contract surged to its highest-ever level of 76,860 yuan per metric ton on the same day.

According to a separate notice issued on Wednesday, the Shanghai International Energy Exchange (INE) is also set to enforce trading limits on crude oil futures contracts starting April 12. Under the new regulations, the maximum intraday position opening volume for each contract will be capped at 3,200 lots.

Information for this briefing was found via The Economic Times and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.