It has been a wild week already on Wall Street.
With large swings in both directions for the major indices and a headline-grabbing feud between short-sellers and retail investors, even a Fed announcement has been struggling to get on the front pages.
But something else has cropped up of late. And it’s a story you likely haven’t heard about at all through the dense clatter of clickbait pieces on GameStop.
Gold is back.
Well, not quite yet. But there’s a new hope that 2021 will be an even bigger year for the metal than 2020’s 23.6% performance.
And as is often the case for such a global commodity, China is at the heart of it.
For years, China has been one of the steadiest driving factors for gold’s stability.
The country is one of the top importers of the precious metal and the world’s largest jewelry maker, which depends on the stuff.
All that changed last year with the outbreak of COVID, first appearing in that very country.
While it was likewise the first to recover from the pandemic, its gold fever never quite came full circle.
Earlier this month, China’s gold import numbers for 2020 came in. And they were dismal.
The country’s net gold imports for the year fell 85% from 2019, on lower demand.
In fact, for many months of 2020, the country became a net exporter. That’s a very rare occurrence for a country with its own drop in mining output and relatively dominant demand year to year.
Despite all of this, gold still did grow at 23.6% last year. What happens if and when China comes back online?
After digging through the recent import numbers, two things strike me about China’s import situation: it is recovering and Wall Street hasn’t realized it.
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September marked China’s biggest month of imports, matching its previous years’ total for the only time in 2020.
Yet, despite this – the world’s most important market for the metal – gold prices actually fell sharply in London.
December, a huge month for China imports ahead of Chinese New Year, also saw a nice net gold import figure.
January is set to be even bigger, with the holiday starting on February 12th this year.
Yet gold hasn’t budged at all.
There’s another indicator that gold traders have been slow to recognize, especially of late: the Shanghai premium just disappeared for the first time since the start of the pandemic.
A quick explanation: gold trades on several markets around the world. The largest for international trade is in London. But for Chinese consumers of the metal, they must go through Shanghai.
So, rather than actual import numbers, some argue that the premium or discount between the two gold exchanges is the better indicator of Chinese demand.
It, after all, is the closest look at what Chinese consumers are willing to pay for the metal compared to the rest of the world.
Well, it just reversed. Gold now costs more in Shanghai than in London:
With Chinese New Year’s numbers yet to really start rolling in and this reversal from discount to premium, gold is actually in a great position.
While the rest of Wall Street argues over the short-selling phenomenon, this is one trade I’d consider to enter February holding.
Gold might have been a poor performer since the summer. But it appears to have gotten its second legs.
To your prosperity and health,
Joshua M. Belanger