China's demand for gold was starting to go parabolic before April's gold swoon, and now the PBoC has to deal with crippling SHIBOR rates and a loss of confidence in its banking system. Wonder what China's famous gold buyer aunts and grandmas do after the PBoC goes about "injecting liquidity" into this sick banking system? The "market" is already seriously out of equilibrium, so this would be quite the trigger.
The evidence provided in the chart below is what could have convinced JP Morgan and other bullion bankers to abandon the last War on Gold short trade and pile in on the long side ["Manipulators of Gold May Not Be Who You Think"].
Chart Source: Eric Pomboy Research
Even more stunning is the difference between the level of physical delivery on the paper Comex market and physical delivery in a real gold market, the Shanghai Gold Exchange. This third chart shows the premium for gold in Shanghai, which of course encourages gold to flow from western depositories (London, ETFs,and the Comex) and producers. You can track the premium by taking the Shanghai price in grams and multiplying it by 5.0666 to get dollars. The premium would then be compared to the spot price. On June 7, before the SGE was closed, the premium was $40.
When you connect the dots about the continuing and persistent price arbitrage between the Comex and Shanghai prices, and also look at the historic low producer contract delivery, it is not difficult to see why the gold backing (chart 1) the trade on the former exchange is on fumes.
Chart Source: 24hGold.com
Chart Source: Jansen Koos