Goldman Sachs: The influence of Chinese traders on global gold prices is "undervalued"

The market is generally focused on the suspected central bank activities during the Asian trading session that are driving gold purchases, but few have noticed that Chinese traders are a significant driving force behind the recent historical highs in gold prices.

Goldman Sachs FICC trader Adam Gillard's latest report points out that the impact of Chinese Commodity Trading Advisors (CTA) on CME gold prices is severely underestimated.

Data shows that when gold prices reached $3,500 per ounce on April 22, only three Chinese brokers traded approximately 212,000 CME equivalent contracts, while the average daily trading volume on the CME so far this year is about 240,000 contracts.

It is noteworthy that despite the astonishing trading volume, the positions of these institutions did not change significantly, indicating that this was primarily short-term algorithmic trading behavior.

Gillard pointed out that this type of short-term algorithmic trading activity has had a "disproportionate" impact on prices during Chinese trading hours (which is also when they are most active) due to lower offshore market liquidity during this period.

According to public information, the ratio of SHFE trading volume to CME trading volume has reached a historical high, further proving the significant impact of Chinese capital flow through SHFE/CME arbitrage rebalancing and subsequent influence from Chinese offshore CTAs on offshore gold prices.

Gillard emphasized that gold is a "flow commodity" because it does not have a balance point, unlike oil or copper. For gold prices, what matters is the extraction volume from the Western world (from central banks, Chinese imports (excluding the People's Bank of China), and subsequent purchases by investors, etc.).

It is noteworthy that the physical gold trading volume on the Shanghai Gold Exchange (SGE) has reached a ten-year high. More unusually, despite gold prices being at historical highs, the physical gold premium remains positive, which contradicts the typical sensitivity of Chinese buyers to price.

Goldman Sachs traders suggest that this may be an early signal of insurance entering the gold market, and investors should closely monitor the development of this trend.

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