Gold prices surged toward $3,400 per ounce on Tuesday, reaching two-week highs just below last month’s record levels across most major currencies. The rally was driven by the US dollar’s decline and news that China, after a long holiday weekend, would allow bullion stored in international vaults to be settled against its gold trading contracts.
Two weeks ago, amidst record-high gold prices of $3,500 globally, the People’s Bank of China (PBoC) called on the Shanghai Gold Exchange (SGE) to “expand and explore the internationalization” of its contracts. As part of a broader initiative to facilitate cross-border financial services in Shanghai, the SGE will begin expanding its warehouse network to Hong Kong. According to Bloomberg, a new vault in Hong Kong, operated by a subsidiary of the Bank of China (the country’s fourth-largest commercial bank and a member of the London Bullion Market Association), will play a central role in this expansion.
This expansion comes after a sharp rally in gold prices, with global gold prices increasing by nearly $100 per ounce on Monday, when both Shanghai and London markets were closed for May Day, leaving the US Comex derivatives market to lead the charge.
On Tuesday afternoon, the Shanghai auction—the benchmark for gold in China, the world’s leading consumer, importer, and central bank buyer—fixed gold above ¥792 per gram, marking a 1.8% increase from last Wednesday’s pre-holiday close. This placed China’s onshore gold price more than $51 per ounce higher than similar quotes in London, highlighting a premium for dealers looking to import new bullion. This premium was more than six times the typical incentive for bullion imports.
In response to the ongoing global trade tensions, China has made moves to expand the international use of its Yuan currency. Beijing’s recent “Action Plan” aims to increase the role of the Yuan in global finance, particularly in light of the US’s tariff policies. E. Yongjian, vice general manager of the Bank of Communications, suggested that the weaponization of tariffs has undermined confidence in the US dollar, making Yuan assets more attractive and promoting cross-border use of the Chinese currency.
The Shanghai Gold Exchange International (SGEI), launched in September 2014, has aimed to enable foreign and domestic holders of offshore Yuan (CNH) to trade bullion in Shanghai’s free-trade zone. Initially, trading volumes surged, briefly surpassing the SGE’s main domestic gold contract in March 2015. However, volumes on the SGEI later collapsed, even as domestic trading set new records.
The international bourse’s volumes dwindled despite the SGE’s efforts to attract foreign traders by offering fee discounts and waivers. Currently, all seven market-making members on the international board of the SGEI are Chinese banks.
Despite the decline in international trade volumes, the SGE’s influence on gold prices has grown, with analysis from Goldman Sachs noting that recent gold price movements have been increasingly driven by flows through the SGE and Shanghai Futures Exchange, surpassing the influence of US-based Comex futures and options.
As of today, the Shanghai gold price is 4.5% below the all-time high of ¥830 per gram recorded on April 22. Meanwhile, the London benchmark auction fixed 1.1% lower than the all-time high of $3,433 per ounce reached on the same day, with the UK Pound price also falling 1.2% below its mid-April peak. Gold prices in Euros were only marginally below their record high of €2,993 per ounce.
The volatility in gold prices over the past month, marked by sharp rises and pullbacks, has largely coincided with the opening hours of the Chinese market, further cementing the importance of the SGE and Shanghai Futures Exchange in global gold price movements.
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