Gold prices buoyed by China, India demand

DEMAND in China and India is supporting gold but analysts believe that a marked shift in investor sentiment is needed to push prices to new heights.

According to the World Gold Council (WGC), which researches and lobbies for miners, China at 967 tonnes and India at 666 tonnes last year, accounted for 53 per cent of global consumer demand. Physical demand in Asia rises when the price falls. In recent months, consumers and hoarders in Asia have tended to buy when the price dipped to around US$1,200 an ounce.

In contrast, Western investor interest has been minimal because the fashion is currently equities, especially tech stocks. In the past few days, however, gold prices have jumped from US$1,204 to US$1,242 as investors expect the US Federal Reserve and other central banks to delay interest rate rises. If there are any increases, they are expected to be small.

The sharp price rise in only six trading days is mainly due to hedge funds covering short, bear positions. Data from the US Commodity Futures Trading Commission (CFTC) shows that hedge funds and other speculators had increased bearish gold derivatives positions, aiming to profit if the price declined.

These speculators had expected gold to fall below US$1,200 on the grounds that key central banks would normalise monetary policy and begin raising interest rates. When the price held and then began to rise, they started to close their positions by buying back gold.

“Gold appears to be forming a bottom and it is encouraging that prices are holding above the 200-day moving average around US$1,230,” said Joni Teves, precious metals strategist at UBS.

She added, however, that the recovery had been “underwhelming considering several factors that are in gold’s favour: net positioning is extremely light, the dollar is under pressure, rates have eased back from recent highs and US data has been relatively soft”.

Gold had a good year in 2016 when it surged from US$1,060 an ounce at the beginning of January to US$1,375 in July. Since then, it has been an up and down market; tumbling from the 2016 peak to US$1,120 in the days before Christmas before recovering to US$1,292 in April 2017, then down to US$1,214 in May, rising to US$1,295 in June, and falling again, before the recent revival.

The big question is whether the current rally will hold in the seasonally weak northern hemisphere holiday months. Key events in the autumn will include wedding gold purchases ahead of Diwali, India’s Festival of Lights in mid-October, autumn purchases for the jewellery industry, ahead of Christmas and then the Chinese New Year – the Year of the Dog – in February 2018.

According to the WGC, the introduction of a small 3 per cent Indian sales tax on bullion and jewellery was lower than anticipated while improved business conditions and higher wages could encourage consumers to buy 650-750 tonnes this year. By 2020, demand could be in the region of 900 tonnes, predicts the WGC.

Chinese consumers are also buying more gold, both for jewellery and for savings. Already, combined purchases of China and India are equivalent to 50 per cent of global mine production, which has been shrinking over the past few years.

Total global stocks of gold

Movements in and out of the huge global gold stockpile have a far greater price impact than differences in annual physical supply and demand – mining and recycled bullion production compared with global jewellery consumption. WGC estimates place the global gold stockpile at almost 190,000 tonnes or over six billion ounces.

At current prices, the value is US$7.5 trillion. At least 40 per cent of this gold is held by investors and central banks, but this is likely to be an underestimate. China, for example, is believed to hold far more gold than official figures show. Middle Eastern figures are also opaque.

Gold, however, is still 35 per cent below its peak of US$1,921 seen during the heady bullion and metals boom in 2011. For the price to rise towards that level, there has to be a major shift from stock markets to precious metals.

In October, it will be the 30th anniversary of the 1987 crash. During that crash and also the crash of 2008, gold plunged with equities, as there was a rush for cash. Soon afterwards, gold rallied as central banks pumped liquidity into the system.

Even if equities don’t tumble from current heights, growing numbers of cautious investors may wish to diversify into gold.

© Copyright Neil Behrmann

This article was first published in The Business Times, Singapore

Jack of Diamonds, the sequel to Trader Jack- The Story of Jack Miner will be published in early this year. Neil is also author of anti-war children’s novel Butterfly Battle- The Story of the Great Insect War.  The updated 2015 Waterloo commemoration version of Butterfly Battle is on Kindle and ebooks. Reviews are on neilbehrmann.net and Amazon and more reviews are welcome. If the books are purchased direct on this site, a proportion of the proceeds will go to low cost charities

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