Shanghai Gold Cheapest to London Since 2012 on Weak Demand

Mar 31, 2014 4:56 am ET

(Updates prices in second and fifth paragraphs.)

March 31 (Bloomberg) -- The spot price of gold in China is on its way to being the cheapest in 18 months relative to the international benchmark in London, indicating waning demand from the world’s largest consumer.

Bullion for immediate delivery on the Shanghai Gold Exchange was $1.47 an ounce below the price in London on a monthly average basis, the first time the Shanghai rate is cheaper than the London price since Sept. 2012, data tracked by Bloomberg News show.

Weakening consumption from China may weigh on the global benchmark price that fell 2.5 percent this month. The price rose 10 percent in January and February, the best start to a year since 2008, as the country more than doubled its net gold imports from Hong Kong in the months. A weaker yuan also undermined bullion’s appeal for the so-called trade financing deals, in which Chinese investors use the precious metal as collateral to get credit.

The discount “proved that as gold gets more expensive, it deterred price-sensitive Chinese consumers from returning to the market after Lunar New Year holidays,” said Fu Peng, chief commodity strategist at Galaxy Futures Co. in Beijing.

Gold for immediate delivery in London reached a six-month high of $1,392.33 an ounce on March 17 on haven demand amid escalating tensions between Russia and the West over Ukraine. The price was little changed at $1,293.84 an ounce at 4:41 p.m. in Beijing, according to Bloomberg generic pricing. Bullion of 99.99 percent purity on the Shanghai bourse traded at 257.80 yuan a gram ($1,290.35 an ounce).

Yuan Loss

“The yuan’s sharp loss this month also discouraged traders from using bullion imports in financing deals to obtain short- term liquidity,” Fu said.

The Chinese currency declined against the dollar as the central bank doubled trading limits versus the U.S. currency, allowing greater exchange-rate fluctuations.

Increased volatility and a weaker yuan added to the cost of currency hedging for those who use gold in trade financing deals, Fu said. Such arrangements partly fueled bullion imports in the first two months, he said.

China’s net shipments from Hong Kong more than doubled to 192.8 metric tons in January and February from a year ago, data showed last week. The country consumed a record 1,066 tons last year as demand for bars, coins and jewelry jumped 32 percent, the World Gold Council said last month.

“We are so used to the situation where gold in China is more expensive than in overseas markets,” helping a steady inflow of shipments moving from west to east, said Liu Xu, an analyst at Capital Futures Co. in Beijing. “That premise is now being put to the test for the first time as gold here is cheaper.”