China Goes Gold Crazy

From a commodity market perspective, financing deals create excess physical demand and tighten the physical markets, using part of the profits from the CNY/USD interest rate differential to pay to hold the physical commodity. While commodity financing deals are usually neutral in terms of their commodity position owing to an offsetting commodity futures hedge, the impact of the purchasing of the physical commodity on the physical market is likely to be larger than the impact of the selling of the commodity futures on the futures market (ZH: unless of course momentum algos take offsetting commodity futures hedge selling in, say, gold and boost, or "ignite" the downward momentum to a far greater degree than the offsetting physical buying, making a recursive pattern whereby buying physical ends up resulting in a lower physical price as has been the case with gold over the past year). This reflects the fact that physical inventory is much smaller than the open interest in the futures market (Exhibit 9). As well as placing upward pressure on the physical price, Chinese commodity financing deals ‘tighten’ the spread between the physical commodity price and the futures price

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Jim Rickards said:

Spoke to head of global commodities trading at LBMA bank. He expects a #gold "demand shock" from #China credit crisis. May be game on there.
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Liberty For All ‏@LibertyisLife Jun 11

@JamesGRickards Please elaborate on "game on there". Also, don't c connection btwn demand 4 gold & credit crisis. Seems counter intuitive.
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Jim Rickards ‏@JamesGRickards Jun 11

@LibertyisLife Chinese can't buy foreign stocks, hate local stocks, banks pay nothing & property's the crash. In crisis, #gold's only choice

Jim Rickards ‏@JamesGRickards Jun 11

@LibertyisLife "Game on" means things have started to play out in visible ways.
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According to the SGE reports published every friday on the previous trading week, Chinese wholesale gold demand year to date, as measured by SGE withdrawals, came in at 998 metric tonnes at the end of July 11 ...

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ancona said:

.........I think once the contagion spreads, if the government does not step in to stop it, there will be all out panic just like we had here. Only this time, it will be on a scale that China will be hard pressed to do anything about.

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