Shanghai Gold trading activity in February 2020

  • 10 Mar 2020
  • By Gregor Spilker
  • Topics: Metals

Premium moved in $0/7 range

Activity in the COMEX Shanghai Gold futures contracts has picked up since the end of Chinese New Year. The month of February 2020 was not short of headlines, with investors re-assessing the risks of the coronavirus to global growth. The last week of February saw massive movements in global financial markets, with equities dropping by 10%, and treasury yields settling at record low levels. Gold typically finds support in such an environment due to lower opportunity costs of holding gold and safe-haven demand. However, the precious metal was not immune to general selling pressure and finished the month on a bearish note.

COMEX Shanghai Gold futures reached an average daily volume of about 1,000 lots in February, with 850 contracts for the USD-denominated product (SGU) and 144 contracts in the CNH-denominated contract (SGC) during the month. Activity was concentrated in the April-2020 contract expiry. A look of the evolution of the spread between COMEX SGU and the flagship 100oz Gold futures (GC) shows that the Shanghai premium ranged between $0 and $7, with the average spread tightening towards $3 at the end of month as the gold market sold off.

Source: CME Group, Bloomberg, intraday data based on 15 minutes intervals

Historically, the spread between Shanghai gold (as measured by the SGE PM benchmark price) and COMEX GC prices has moved in a relatively wide range, with Shanghai pricing reaching levels of $20 premium over GC. Typically, GC trades at a slight premium to the London market, but that spread is not nearly as wide or volatile as the price differential against Shanghai prices.

Source: CME Group, Bloomberg

Implied FX trade vs USD/CNH spot rate

With COMEX offering both USD and CNH contracts for the same underlying Shanghai old, participants can use the contracts to track an implied USD/CNH foreign exchange rate. In theory, the ratio between prices for the CNH-denominated contract and for USD-denominated futures should track the USDCNH exchange rate after adjusting for the different contract sizes (SGU tracks the price of a troy ounce of gold, while SGC tracks the price of a gram of gold. A troy ounce weights 31.1035 grams).

As we explained in a prior article, managing the two contracts creates an exposure to the USD/CNH exchange rate. Participants that are able to actively trade the two contracts may also explore arbitrage opportunities when the implied price moves away from its theoretical value.

Source: CME Group, Bloomberg. Based on daily settlement prices for Shanghai Gold USD and CNH active month futures and USDCNH spot FX.

In addition, below charts show the daily OHLC range across the month for both contracts and highlights the growth in SGU volume traded during the month, especially in the last week (February 24 – 28).

Source: CME Group, Bloomberg

Source: CME Group, Bloomberg

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