China Still Missing from Gold Price

When will China's demand impact gold prices and make them rise...?

 

WHILE the gold price has fallen from $1650 to $1180 over the last year, China has acquired perhaps 2,000 tonnes, writes Julian Phillips at the GoldForecaster.com, a remarkable feat.

 

How long can the world's second-largest economy keep on doing this without the gold price rising rapidly? The short answer is, for as long as demand in the traditional markets is either lower or the same as supply.

 

This has two aspects, first the potential for rising demand and second, the potential for falling supplies.

 

The main traditional market is London, where supposedly 90% of physical gold is traded. China buys there, 'on the dips' by importers taking bulk supplies and shipping them to Hong Kong as stock for the distributors to the retail trade on the mainland.

 

China's import stockpiles are replenished according to perceived future demand, hence the premiums that appear there. This gap above international prices works as to not push the base price higher. But Chinese importers buy large volumes from other sources, direct.

 

Indian demand is primarily routed through the London market, via the banks that supply India. The world's former No.1 buyers are now locked out, however, by strict import restrictions. European and US physical demand also accesses much of its gold there too. These last two buyers have been negative for over two years now, supplying investment metal back to market but particularly in the last year. Will that demand pick up?

 

For Europe and the US, we don't expect it to do so while US fund managers are selling gold from the gold exchange traded funds listed there, to switch into equities. European investors now expect the same economic outlook as we see in the US in the next two years, but we do not see selling in Europe at anywhere near US levels in 2013.

 

As for India, government officials have already started saying they will be reducing import duties and easing import regulations on gold (and silver) "soon". We expect this to happen well before the elections in May this year. Potential demand from that source could be as high as 75 tonnes a month, or around 18 tonnes a week, up to 900 tonnes a year. This would swamp the market, where demand and supply are around the same levels currently.

 

While this seems a fatuous question, it must be asked to understand Beijing's position. Right now, China is still developing its access to gold suppliers both in the traditional markets and outside of these markets. It cannot hold back retail demand because of price, and does not want to do that.

 

Policy has been for households to acquire as much gold as they can. So the Beijing authorities accept the discipline of price. As a constant buyer, unless China forcefully regulates gold imports, it must allow access to all gold markets. This won't happen!