Shanghai exchange seen driving gold far higher


Gold Futures Fly High in Shanghai

By Javier Blas and Chris Flood
Financial Times, London
Wednesday, January 9, 2008

The strong debut Wednesday for the Shanghai gold futures market boosted the price of spot bullion to a fresh record high as investors anticipate a wave of Chinese investment in the precious metal.

Gold prices have been on a record-breaking run in recent months, as investors seek refuge from weakness in the dollar and concerns about the health of the global financial system. The price of spot bullion has gone up 40 per cent since January 2007.

Shanghai's investors paid a large premium of about $100 an ounce over international gold prices, with the June futures contract hitting an intraday high of Rmb 230.95 a gram, or almost $1,000 an ounce.

Traders, however, warned that the Shanghai premium was a reflection of the lack of connectivity between the Shanghai market and the London-based over-the-counter gold market, rather than a signal of the likely direction of world prices.

Spot gold in London hit a fresh record high of $891.4 an ounce on Wednesday on the back of the Shanghai launch, before profit-taking pared gains and it fell to about $880 an ounce.

Eugen Weinberg, commodities analyst at Commerzbank in Frankfurt, said demand would be driven "massively higher" following the start of gold futures trading in Shanghai, as a whole range of gold derivative products could now be introduced into China.

The new market traded contracts for about 350,000 ounces of gold on its first day, a level that traders considered extremely positive given that the well-established Comex, the New York-based metals exchange, usually trades about 800,000-1 million ounces a day.

John Read, precious metals strategist at UBS in London, considered the launch of the Shanghai gold futures the most important development in the bullion market since the introduction of exchange-traded funds in 2003.

The eight largest gold ETFs now hold about 840 tonnes of gold -- more than the official bullion reserves of the European Central Bank.

In the absence of a China-based gold ETF, Suki Cooper at Barclays Capital said there would be strong investor support for the new futures market.

"We expect to see another strong increase in overall Chinese gold demand in 2008 from last year's estimated 300 tonnes," Ms Cooper said.

China is the world's third-largest consumer of gold used for jewellery and investment after India and the US, according to the industry-backed World Gold Council.

"The launch of the Shanghai gold futures contract seems likely to be the trigger for gold to hit the $900-an-ounce-level, probably before the end of the week," Mr Reade said.

However, some traders warn that the bullish sentiment among institutional investors contrasted sharply with the dormant market of physical gold trading.

The last rush of gold buying by jewellery makers came when gold traded at $700-$750 an ounce, and traders said that a price correction would be necessary before prices climbed any higher.

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