Why Another Chinese Gold Mania May Be Starting

China's futures traders fueled gold's explosive $400 surge this past spring. After a five-month hiatus, they may be poised to drive gold to $3,000.

Two weeks ago, I published a Substack piece where I explored the potential for another China-driven rally in gold, one that could quickly push prices to $3,000. My thesis was rooted in the observation that China's futures traders were the driving force behind gold's explosive $400 surge this past spring. However, these traders had been dormant for the past five months as the yuan price of gold stagnated. I proposed that a technical breakout in the yuan price of gold could trigger a resurgence similar to the powerful rally we saw in the spring. Since sharing that idea, I’ve been watching for a breakout in the yuan price of gold—and it appears that moment has arrived.

Let’s start by examining the chart of Shanghai Futures Exchange gold futures, the primary driver behind the gold frenzy in March and April. Since the April peak, prices have been oscillating within a well-defined trading range. However, in a promising turn of events, the contract has recently experienced a technical breakout as Chinese traders returned from the Mid-Autumn Festival, which had closed the country’s financial markets for three days. Although the breakout has been tame so far, with low trading volume, there’s significant potential for it to gain momentum—especially once volume increases to confirm the move.

The international spot price of gold in yuan (which is distinct from the mainland China gold price) had also been trading within a well-defined range since April. Its recent breakout lends further credibility to the breakout seen in Shanghai Futures Exchange gold futures.

The U.S. dollar price of gold has also been on a strong upward trend, breaking through two key resistance levels in the past month and a half:

An April Financial Times article titled "Chinese Speculators Super-Charge Gold Rally" provided a compelling explanation of the gold price surge this past spring. The article highlighted how trading volume in SHFE gold futures had surged by 400%, propelling gold prices to record highs:

Additional evidence of the Chinese gold trading frenzy earlier this year is visible in the chart of open interest in SHFE gold futures:

As the World Gold Council’s chief market strategist John Reade remarked in the Financial Times:

“Chinese speculators have really grabbed gold by the throat.”

“Emerging markets have been the biggest end consumers for decades but they haven’t been able to exert pricing power because of fast money in the west. Now, we are getting to the stage where speculative money in emerging markets can exert pricing power.”

Now that SHFE gold broke out of its trading range, it is likely to follow what technical analysts call a “measured move,” which is when a rally after a consolidation pattern is projected to rise the same number of points as the rally that preceded the consolidation pattern. According to that principle, gold is likely to reach approximately $3,000 in just a couple months after breaking out! In case that sounds preposterous, that is only a 14.2% move from here.

To summarize, all signs point to the potential for another China-driven gold mania similar to the one that propelled prices earlier this year. The breakout of Shanghai Futures Exchange gold futures from their trading range, coupled with the rising price of gold in most major currencies, suggest that speculative fervor could soon return with full force. The strong likelihood of a measured move indicates that gold could quickly reach the $3,000 mark, fueled by renewed interest from Chinese traders. As the market dynamics shift, the influence of emerging market speculators on global gold prices is becoming increasingly apparent, setting the stage for what could be a dramatic surge in the months ahead.

Such a surge would certainly benefit silver as well, driving it up to $50—a scenario I explored in yesterday’s Substack piece.

Please subscribe to my Substack and follow me on Twitter.