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China’s updated trading rules for gold and silver squeeze speculators, but quality purchases are rising – Metals Daily CEO Ross Norman

Gold’s current pullback is driving one kind of buyer from the market, but the high-quality purchasers are going nowhere, according to Metals Daily CEO Ross Norman.

“Not all buying is equal and that is becoming apparent to gold,” Norman wrote in a recent post. “Arguably, the physical buying interest from central banks as well as Chinese retail purchases underpinning this market could count as some of the highest quality,” as neither are likely to disappear due to price fluctuations.

By contrast, he believes that the speculative flows that entered the precious metals market as gold set new highs were asset-agnostic and fickle by nature. “[I]t’s a pure exercise in making money,” Norman said. “Long or short … gold or soda ash futures … who cares. Like 12-year-olds high on e-numbers, the futures market can be a riot of activity, rife with rumour and everyone keen to jump on the latest fad.”

He wrote that people measuring gold from March 1, when it began its sharp rise, would likely consider $2,060 as the true support level for the precious metal. “That said, physical buyers who missed the rally will likely jump in as the market retraces, setting a much higher floor,” he said. “The charts offer some guidance – with the 100 dma at $2250 and this will likely be the first port of call …will it hold?”

Norman thinks that will depend on how many long liquidations come out of the country that’s been driving this bull market.

“China has tightened trading conditions as a safeguard in a gold market that it clearly deems to be too hot,” he said. “On April 8th, the Shanghai Gold Exchange (SGE) advised gold margin requirements would be tightened from 10% to 12%, and the daily price limit would be adjusted from 9% to 11%. On April 12th, further adjustments were made. Starting from the close of clearing on April 15th, the margin requirement for gold contracts was increased from CNY 45,000 per lot to CNY 51,000 per lot.”

He noted that the SGE made similar adjustments to silver after it hit ‘limit up’ on April 8.

“More importantly, on April 10th, the Shanghai Futures Exchange (SHFE or Shiffy) similarly announced the reduction of trading limits for gold futures, with a maximum number of contracts for intraday gold trading set at 2,800 lots, Norman said. “On April 16th, the SHFE further adjusted the daily price limit for gold and silver futures to 8%, while increasing the hedging trading margin requirement to 9% and the speculative trading margin requirement to 10%.”

He said these changes have had a significant impact on China’s gold market, and because this market has been the driving force behind global price appreciation, it has dampened demand and prices across the world. “It is a passion-killer,” he said. “It follows that Chinese speculators would look elsewhere.”

Norman pointed out that gold saw the largest price decline in 14 months on Monday, “followed by further significant declines today with large volumes being traded in Shiffy.”

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“There is a sense that the speculative froth is leaving the market, and as it declines, gold will re-engage with its core physical buyers who have been left behind,” he said. “If you want to know where that floor is then the charts will give you a view – and if not, Indian bargain-hunting is normally a great bell-wether. In short, this is healthy for gold.”

Norman also noted that just as gold prices were collapsing, rumors were circulating that the Chinese government intended to build up stockpiles of nickel, which caused nickel prices to shoot up by 6.5% on the SHFE. “[A] coincidence?” he asked. “I think not.”

He also pointed out that Chinese gold ETF purchases have suddenly taken off, with 28.5 tonnes of inflows over the last four weeks.

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“So as speculators depart stage left, it appears that ‘quality’ gold investment is re-entering stage right,” Norman concluded. “So grounds for encouragement.”

Source: Ernest Hoffman Kitco