Gold Premium Surges in China

The premium paid for gold in Shanghai hit an all-time high of $121 above the London gold price during the second week of September, reflecting continuing strong demand among the Chinese.

Worried about their nation’s slumping economy, particularly its troubled property market, many Chinese are trying to increase their safe haven holdings of gold. But it’s not just strong demand in the world’s largest gold market that has been driving a steady increase in the premium at the Shanghai Gold Exchange.

China has been spending heavily to prop up its slumping currency, the yuan, which in early September fell to its lowest level against the dollar in 16 years. As a result, the government has cut back on gold purchases in the international market. So there is limited supply of the precious metal for the general public. In August, the Chinese government stopped granting banks permission to import gold, an effort to rein in safe haven buying.

“It looks as if there’s been no imports,” Rhona O’Connell, an analyst at StoneX , told Bloomberg News. “That also makes sense because of the efforts that they are putting in to defend the currency.”

While China has been limiting the availability of gold to the public, its central bank, the People’s Bank of China, has been adding gold to its reserves, buying the precious metal for 10 months in a row.

Unless China increases gold imports, the Shanghai premium could rise even higher as a result of seasonally strong demand for gold during China’s wedding season in October.