How Chinese Traders Will Help Drive Gold to $3,000+

China's futures traders drove a remarkable $400 surge in gold prices this past spring, and now they are positioned to propel it to $3,000 and beyond.

In my debut Substack article on September 6th, I theorized that Chinese futures traders would return from their summer hiatus with renewed vigor, to drive gold prices sharply higher once again in an encore of their spring performance, when they pushed prices up by $400, or 23%, in just six weeks. When I wrote that article, gold was trading at $2,497 an ounce; today, it stands at $2,738 an ounce. I'm now providing an update because the trend I anticipated is unfolding as expected, and I believe the most thrilling, explosive phase is still to come.

The Shanghai Futures Exchange (SHFE) gold futures were the primary vehicle behind the gold frenzy in March and April, a surge that subsequently spilled over into international gold prices:

A fascinating Financial Times article from that time titled "Chinese Speculators Super-Charge Gold Rally" highlighted how trading volume in SHFE gold futures had surged by 400%, propelling gold prices to record highs:

The spring Chinese gold trading frenzy can also be seen in the chart of long open interest in SHFE gold futures:

Following the Chinese-driven gold frenzy in the spring, it was as if a switch flipped off on April 15th, leading SHFE gold futures to trade sideways for five months. In my original September 6th article, I explained that SHFE gold futures were merely taking a pause, likely setting the stage for another surge similar to the one seen in the spring. I also noted that a decisive close above the 585 resistance level would trigger a new rally in gold prices—not only in China but globally. As the chart below shows, that’s precisely what’s happening:

As shown in the chart below, the international spot price of gold in U.S. dollars traded in a choppy manner from April until mid-September, when it hit an inflection point and began climbing vigorously once again. This timing is no coincidence; it aligns with SHFE gold futures breaking out of their trading range, drawing Chinese traders—known for their strong affinity for gold—back into the market.

Technical analysis of SHFE gold futures implies that the international gold price in U.S. dollars should reach approximately $3,000 per ounce during the current rally. This projection relies on the concept of a “measured move,” where the price following a consolidation pattern or trading range is expected to rise by the same number of points as the rally preceding the consolidation. The diagram below illustrates how measured moves work:

The chart of SHFE gold futures below shows a 105 yuan/gram rally in the spring, followed by a five-month trading range. This suggests that the current rally should also reach 105 yuan/gram, projecting a target of 690 yuan/gram, or roughly $3,000 per ounce. This target is also logical because $3,000 is a significant psychological level, and major levels like that typically act like a magnet for prices. And, in case $3,000 seems ambitious, it’s only a 9.3% increase from current levels. I’m confident that gold will climb even higher in the course of this bull market, though it may pause or consolidate around the $3,000 level for a time to catch its breath.

Gold analysts and investors who closely follow developments in China often monitor whether the domestic Chinese gold price trades at a premium or discount compared to the international price. In recent months, China’s domestic gold price experienced an unusual discount of up to $40.60 per ounce against the international price. However, this discount has quickly reversed following the breakout in SHFE gold futures, with Chinese gold now trading at a $1.10 per ounce premium over the international price. This transition from a discount to a premium is an indication that gold trading activity in China is starting to heat up once again.

Another sign that gold trading activity in China is heating up is the recent increase in SHFE gold futures trading volume over the past two months. As seen in the chart, volume surged dramatically during the spring rally. While trading activity is currently rising in a measured and orderly way, I expect it to ramp up significantly as the rally progresses toward $3,000. That’s when the real frenzy in Chinese gold trading will likely begin in earnest.

Despite rising gold prices and increased trading activity, the high cost of gold has actually dampened physical consumer demand in China. According to Bloomberg, overall demand fell by 22% to 218 tons in the three months leading to September, with jewelry consumption dropping 29% to 130 tons and bar and coin purchases declining 9% to 69 tons. This suggests that the rapid price surge has created sticker shock for many Chinese consumers, who are likely waiting for a price dip to buy at more favorable levels.

The reality is that high gold prices are here to stay, however, with even further increases ahead as global debt, money supply, and inflation continue to rise. Soon—possibly during the intense “frenzy phase” I mentioned—physical gold buyers may recognize that prices aren’t dropping and, driven by the fear of missing out (FOMO), start buying aggressively before prices climb even higher. This shift in behavior will only add further fuel to the fire.

Another factor supporting the bullish outlook for gold in China is the country's struggling economy, weighed down by the collapse of massive bubbles in real estate and the stock market. In response, the Chinese government recently announced a plan to issue special sovereign bonds totaling approximately 2 trillion yuan ($284.43 billion) this year as part of a new fiscal stimulus. Fiscal and monetary stimulus programs are typically bullish for gold because they add to national debt, debase the currency, and drive inflation higher. Burdened by a substantial overhang of bad debt, inflated asset prices, “zombie” companies, and a rapidly aging population, China is now on a path toward an addiction to stimulus to keep its economy afloat—much like the United States, Europe, and Japan.

Source: Financial Times

In conclusion, the stage is set for Chinese traders and investors to continue fueling a powerful rally in gold prices, pushing it to $3,000 and then beyond. Now that SHFE gold futures have broken out of their consolidation and trading activity is heating up once again, all indicators point toward a renewed surge that could mirror or even surpass the intensity of the spring rally. Meanwhile, China’s economic struggles and increasing reliance on stimulus add further support to the bullish outlook for gold. As global debt and inflationary pressures rise, and with Chinese physical gold investors and consumers likely to return in droves once they recognize that high gold prices are here to stay, the conditions are primed for an explosive phase in the gold market. This momentum, driven by both domestic factors in China and international dynamics, is likely just the beginning of an even greater upward trend.

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