Does physical demand from China put a floor under the gold price...?
THE MASSIVE sell-off in the price of gold bullion has certainly shaken up some investors, writes Sasha Cekerevac of Investment Contrarians.
However, it seems there are others whose investment strategy has been to wait for a pullback in gold to continue accumulating the precious metal.
Recent data has shown that China imported gold bullion from Hong Kong at a record-high level in March. Net imports into China of gold from Hong Kong were 130,038 kg, compared to 60,947 kg of the yellow metal in February, according to Bloomberg. (Source: "China's Gold Purchases From Hong Kong Expand to Record," Bloomberg, May 7 2013, last accessed May 8, 2013.)
While these imports happened prior to the sell-off in the price of gold bullion in April, China has clearly been using an investment strategy to continually accumulate the precious metal whenever it can. With the price of gold in April dropping 14% in just two days—the biggest sell-off in 30 years—this led to an increase in demand for jewelry and coins in China.
Essentially, gold transactions have increased as many more participants use the metal for trading purposes as an investment strategy. Exports of gold from China into Hong Kong were 93,481 kg, a huge jump from February's exports of the yellow metal of 36,159 kg. Profiting from the volatility, trading in gold continues to skyrocket globally.
The volume of gold bullion on the Shanghai exchange hit a record high on April 22 of 43,272 kg. As more traders use gold in their investment strategy, transactions continue to increase substantially. Following the sell-off in gold bullion prices on April 15 and 16, the China Gold Association reported that retail sales tripled in China as individual customers used the sell-off as part of their investment strategy to accumulate the commodity.
What does this mean for gold bullion in the future?
Clearly, we're seeing increased demand for gold bullion as part of an investment strategy by many participants globally. Especially in India and China, gold is seen as a store of wealth. In countries where the local currency is not stable, gold will always be attractive.
The real question is: will there be enough physical demand to overcome the massive level of supply that's driven prices down?
We all know that many central banks around the world continue an easy monetary policy stance. This should drive commodities such as gold bullion higher, as this has historically led to higher inflation, and having a diversified portfolio as part of one's investment strategy makes sense.
However, the velocity of money continues to be at historically low levels. This means that the money printed is sitting idle, not being injected into the economy—which is why we're not seeing high levels of inflation. At some point, the idling is expected to end, and we should see higher levels of inflation. However, no one can predict the future.
These early reports of retail buying appear to offer the theory that there is a floor in the price of gold bullion supported by physical demand. Clearly, there will be significant resistance on the way up for the price of gold. What we don't know is if this recent bout of gold buying by the Chinese consumer has exhausted most of their cash. This could result in a lack of momentum for the price of gold.
Ultimately, gold bullion will need to move above several key technical levels before more buyers emerge as bullish in their investment strategy for this commodity. It is a positive sign to see physical buyers stepping in and supporting gold after such a massive sell-off, but the market will need much more demand before a new trend is established.