GOLD PHYSICALS WEEKLY – Chinese gold premium spikes, Indian imports surge

The premium for gold in China has returned to normality, following a brief spike earlier in the week that saw many arbitrageurs taking advantage of the devaluation of the currency.

The premium in Shanghai hit heights of $7 over the London spot price earlier in the week before settling back at an average of $2-3, a level unchanged from last week, traders said.

On Tuesday morning, the People’s Bank of China devalued its currency by 1.9 percent against the US dollar, the biggest one-day drop since 1994. Two additional devaluations followed on Wednesday (1.6 percent) and Thursday (1.1 percent).

As a result, the Shanghai physical gold and deferred contracts shot 0.7-0.8 percent higher than the London price at one stage, a Chinese trader told FastMarkets.

“The gap existed for about 3 to 5 minutes – then the arbitrageurs made the gap disappear,” he said. “The depreciation of the yuan pushes up the onshore gold price, but in my opinion, the main reason [for the spike] is the unsymmetrical difference between gold and the currency markets,” he added.

While gold demand in China has increased in recent weeks, supply is more than ample and the long-term outlook for consumption is still slack, according to traders.

Withdrawals from Shanghai Gold Exchange vaults – a useful barometer but not necessarily a direct indication for demand – suggest that buying has been higher since the beginning of July.

Vault withdrawals exceeded 250 tonnes in July, the highest total in years. For the week ending August 8, 56 tonnes were withdrawn from the exchange, slightly higher than the 53 tonnes in the week before.

In India, the premium has ticked marginally lower, following news that imports of gold soared well past expectations in July and due to an uptick in the local price of the metal.

The premium in Ahmedabad/Mumbai was quoted at $1.50-$2.00 above the London spot price on .995 gold, traders in India told FastMarkets.  This is slightly lower than last week, but a depreciation in the rupee has seen the local price of gold slightly higher.

Around 95 tonnes of gold were imported into India in July, sources said, well past the monthly average of 40-50 tonnes that have been shipped in in previous years. Of that number, around 25 tonnes were in the form of semi-pure doré bars, a source said.

“Much of this metal was likely due to local buyers wanting to stock up before the festival season while the price was low,” he added.

Inventories are already high after the removal of the 80:20 legislation in November, which prompted a rise in imports. Around 55 tonnes were imported in June, 62 tonnes in May, 81 tonnes in April and 131 tonnes in March, with extremely high import figures also recorded towards the end of 2014.

As a result, local observers believe that bullion dealers and jewellers across the country could collectively be holding as much as 100 tonnes of gold. The vast majority of this will be held by the dealers, with smaller portions held by fabricators and jewellers.  Some of the country’s larger banks however have denied this.

But a good monsoon season so far is the main driver of improved sentiment. The domestic agricultural sector accounts for as much as 60 percent of gold demand – farmers use gold as a primary store of wealth because they have limited access to the formal banking system.

The upswing in both demand and imports in the Indian market is affecting the Dubai premium. Last week, many dealers moved material out of the Emirates to meet the uptick in demand from India, resulting in a rare shortage of metal in one of the region’s largest consumers, a local source said.

This theme appears to have continued, with the premium remaining slightly higher around $1 on 995 gold and $1.25-$1.50 on four nine metal.

Demand in Hong Kong has slowed slightly after a punchier start of the week. Some sources pegged the premium at around $1.25 to $1.50 over spot on Swiss brands, while Japanese bars are slightly lower.

In Singapore, the premium has remained firm, though the market had been observing a national holiday at the beginning of the week. Premiums reflect the general uptick in East Asia at $1.75-2.00 on Swiss brands.

In Tokyo, the market remains in a marginal discount – traders have however noted an uptick in demand in line with the weaker yen and the drop in the international spot price in mid-July. The spread remains around 30-40 cents on LBMA brand kilobars.

In Turkey, the conclusion of Ramadan and the start of the wedding season continue to prop up demand despite the lira hitting a fresh all-time low this week – which pushes the local price of gold higher. Still, the premium on the favoured LBMA .995 1kg bar has held at around $2 to $3.

Turkish imports of gold jumped in July to their highest since November 2014 at 14 tonnes, though much of Turkey’s supply comes from the secondary market and the country’s small mining industry.

In Bangkok however, the premium has dropped, though the country was also observing a national holiday on Wednesday. Gold is at a premium of around 80 cents and $1.20 on 96.5-percent purity bars, with traders noting that there are simply more sellers than buyers at the moment.

(editing by Perrine Faye)