Insights 
VT 
Gold stocks at Shanghai Futures Exchange warehouses have reached over 36 tonnes, almost doubling in a month. Traders take advantage of the gap between high futures prices and cheaper spot gold, delivering physical gold to the exchange.
The World Gold Council notes strong speculative demand in China due to low interest rates. Despite gold’s support from geopolitical risk and economic uncertainty, a disconnect is evident. Retail jewellery demand in China decreased by 45% quarter-on-quarter. Meanwhile, investment demand for bars and coins stays steady, and gold ETFs face outflows as retail investors move to equities.
Buildup In Shanghai Warehouses
The massive buildup of gold in Shanghai warehouses to over 36 tonnes is a key signal for us. This is happening because traders are taking advantage of the unusually wide gap between high futures prices and cheaper spot gold. This arbitrage opportunity is flooding the exchange with physical supply.
We believe this situation suggests Shanghai gold futures could face downward pressure in the coming weeks. The high inventory acts like a cap on prices, and the arbitrage opportunity will likely narrow as futures prices fall closer to spot levels. Looking at recent data from late July 2025, China’s Caixin Manufacturing PMI at 50.1 hints at a softer economy, which does not support sustained high prices.
There is a clear split in the market, creating uncertainty. While Chinese retail jewelry demand fell 45% last quarter, investment demand for physical bars and coins is firm, showing a divide between consumers and speculators. This kind of disconnect often leads to increased price volatility, presenting opportunities for options traders.
Historical Patterns And Global Climate
We are reminded of a similar pattern we observed with LME copper inventories back in 2023. A rapid surge in warehouse stocks back then was followed by a period of price consolidation and weakness. That historical precedent strengthens our view that the current gold inventory levels in Shanghai are a bearish signal for local prices.
Despite the weakness in Shanghai, the broader case for gold remains supported by global economic uncertainty. For instance, COMEX gold futures have been holding relatively firm around the $2,450 per ounce mark this past month. This suggests the current issue is more localized to China, potentially setting up a relative value trade of shorting Shanghai gold against a long position in COMEX.
