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China is Testing Comex Legitimacy

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by VBL
Monday, Nov 27, 2023 - 14:00

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Background: China's Gold Appetite Appears Insatiable


We read this in the latest TD CTA report on Gold:

Don't look now, but the top gold traders in China have just added nearly 17.5 tonnes of notional gold to their books over the last week. Tracking of the top traders in Shanghai points to a massive accumulation of gold, just as signs of buying exhaustion appear in the West. After all, our advanced positioning analytics are pointing to buying exhaustion from both CTA trend followers, with today's session likely to mark the final (albeit marginal) buying program before prices break north of $2100/oz, and discretionary traders, given our gauge suggests they have now fully covered their book short.

Daniel Ghali, TD's Senior Strategist continues: The causal force behind China's behemoth purchases is unclear, but the concurrent strength in CNY may be lending a cue, amid reports that state-owned banks have been active in currency markets this week to help hasten the yuan's recovery against a weakening USD.

While Daniel's handicap is a very likely scenario; here is a seemingly more controversial point of view as to what is going on in China as well as the USA. It is in actuality, simply a normal process tied to supply-demand economics. 


  1. Intro
  2. China is Forcing Things Now.
  3. The Fractional Reserve Commodity Bank-Run
    • Damned if they restrict….
    • Dammed if they don’t.
  4. China’s Game of Chicken
  5. Uncomfortable Choices
  6. Reprice or Run Out
  7. The Third Option
  8. More TD CTA analysis

1- Intro:

Authored by GoldFix ZH Edit

The title of this note ties several observations together being watched for some time. It does not to purport to know China’s intent. What it tries to do is handicap, (if recent patterns continue), the likelihood of a giant face-off in exchange legitimacy down the road between every commodity exchange outside the US, versus the US exchanges themselves as a proxy battle for USD hegemony itself.  The easiest place to see this in is the US Comex versus the SGE, DBE, and other BRICS exchanges.

In predicting this, or at least trying to handicap its probable path, certain events (Comex drains, Shanghai premium, China taking Gold delivery, and so on) have made it clear the US may need  to make a decision soon. And while it is China forcing this decision on us with their actions, if is we who set the table for the current events with our own actions for decades.

2- China’s Policy-Actions are Forcing Things Now.

The US Dollar’s global dominance is assisted in no small part by its pricing hegemony over globally-traded commodities.A way that global commodity-pricing  dominance can be broken is by simply (but not easily) calling the physical commodities in the US over to oneself. This also happens to be a logical end-game path in the Collateral crisis that Zoltan Pozsar alerted us to — and we in turn alerted GoldFix readers to — in 2022.

That resource depletion may be happening right now in Gold (after Silver’s vaults were similarly emptied with exports a contributing factor) it would seem.

Therefore, unless the US can produce or procure more collateral organically through rebuilt supply chains, its own resources will eventually be depleted1.

3- The Fractional Reserve Commodity Bank-Run

One reason the above is now in play for gold, and possibly concerning for US interests, is gold’s potential reemergence as a global settlement medium. To that effect:

[B]anks have been managing their paper gold books with one assumption, which is that [Nation] states would ensure gold wouldn’t come back as a settlement medium. From Gold-mageddon Deconstructed

Nations that used to be satisfied with promises of Gold now want the actual gold.. a problem for US exchanges running low on supply as foreign demand trickles in due to lower pricing. Ignoring this is a big problem. Addressing it, if they do may also be a big problem.

The other path is to lessen Chinese demand… 

Damned if they restrict….

The US cannot prevent a nascent commodity bank-run style depletion without damaging its reputation as a free-market for transparent price setting. If, however, it restricted delivery, the US would forfeit its pricing power leadership in those commodities.

Dammed if they don’t.

Yet, if it does not restrict delivery, the US supply will keep being arbitraged out of existence and end up in China as a commodity holder. 2 What can be observed to this effect?

4- China’s Game of Chicken

First, the Shanghai premium of Gold to US prices remains resilient. Waxing and waning, but not disappearing. Second, someone with a foothold in China and the USA did take delivery of Comex Gold in October, and we assume will do it again.

Third, (and this is important3 but noone talks about it.. yet.) there is no globally agreed price for Gold, as decreed in 1976 Jamaica Accords which themselves formalized the 1971 death of the Gold standard.  From our post: 1976: Official Gold Pricing Abolished

The Jamaica Accords 1976: IMF made several changes.

  • Official gold price was abolished; IMF sold off one-third of its holdings.
  • SDRs were to become a more important reserve asset.
  • IMF was to maintain surveillance of global exchange rate behavior and advise members.

This “delisting” of global gold pricing then was to keep Gold fragmented regionally and to inhibit its resurgence versus the USD.  Gold was demoted to an arbitrage-able “collectible” that was kept around for “tradition” as Bernanke told Ron Paul once.

As long as everyone was on the same page benignly ignoring it, that worked. But now ideology has shifted away from Fiat (for now) towards Gold as a bridge for some nations to sever (or at least lessen) ties with the USD and its ability to influence their own natural resources. China and its BRICS pals are no longer on the USD unipolarity page.

Putting the above three things together:

  1. Shanghai Premium
  2. China taking delivery
  3. No globally recognized price...

...creates a circumstantial game of chicken.

5- Uncomfortable Choices

The US  must keep its Comex "Gold window" open if it wants to continue being  the generally accepted (but still unofficial)  global price-setter of Gold. But also must continue to honor deliveries when asked in order to keep that status.China is now letting its own gold price float higher than the US in volumes large enough to attract institutional arbitrage (by either the PBOC, a US bank, or some other entity who sees money to be made)

Therefore: fragmented price discovery,  once a feature preventing global  adoption of gold for universal currency, now is a bug leading to regulatory arbitrage on account that gold is increasingly being used as a global reserve asset again.

Continues here ...

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