2013-08-07

Shanghai Gold Premium

I found this definition of the Shanghai Premium.
Definition: Shanghai Gold Exchange Au9999 Gold (USD) minus London Gold Market Fixing Ltd – LBMA AM Fixing Price/USD.
“The Shanghai Premium is calculated on a weekly basis. Formula: (SHGF9999 Index * CNYUSD Curncy * 31.1g/oz) – GOLDLNAM Index”.
Source: Redemptions In The GLD Are Bullish For Gold

When I did my calculations, however, I saw this on the LBMA website: Specifications for Good Delivery Bars
The physical settlement of a loco London gold trade is a bar conforming to these specifications:

The gross weight of a bar should be expressed in troy ounces, in multiples of 0.025, rounded down to the nearest 0.025 of a troy ounce.

Fineness: the minimum acceptable fineness is 995.0 parts per thousand fine gold.
Interesting that there's a difference, and Shanghai does also trade Au9995 bars.

In any event, the popular premium calculation is a weekly one. Instead, I calculate the difference between the Shanghai close and the London open and compare it to the change in the renminbi exchange rate, looking to see if there was any currency effects. The result is as follows:

Here it is against the exchange rate of CNY, which does show some correlation between the rising yuan and high premium in Shanghai, perhaps from buyers moving gold into China to capture renminbi appreciation. It will be interesting to see what happens if and when the yuan devalues as I expect.

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