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China will Boost Gold Prices

Written By Brian Hicks

Posted August 15, 2013

If you’re interested in gold, or if you already hold it, look toward China for salvation.

Over the past six sessions, gold has now risen for five straight times against a weakened dollar and rising speculation that China—now the world’s second-largest gold consumer—will soon become the first.

GOLD OUTLOOKBloomberg reports that the China Gold Association recently noted that purchases had risen by 54 percent to 706.4 metric tons in the first half of this year. Demand was up 87 percent for bars and 44 percent for jewelry.

From Bloomberg:

“The weakness in the dollar is helping gold,” Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago, said in a telephone interview. “The market sees Chinese demand growing as the economy continues to improve.”

Gold futures for December were up 1 percent and settled at $1,333.40/oz on the New York Comex, though trading was 35 percent below average over the past 100 days. Overall, prices are up 4 percent since early August.

Thus far in the year, gold is down 20 percent. Low U.S. inflation caused a crisis of confidence, and demand for gold bars and jewelry surged when prices fell. India, still the world’s top gold consumer, raised import taxes in order to try and combat current-amount deficits.

It’s widely expected that China will overtake India for that position sometime this year, and this anticipation appears to be carrying gold further up. Earlier in August, SPDR Gold Trust holdings rose by 0.2 percent to hit 911.13 tons—that’s the first such increase in two months.

According to Reuters, gold’s price drop—about a fifth so far in 2013—after some twelve years of continued gains has made the metal highly attractive to heavy consumers. That’s where India and China become crucial players, and that’s why the data emerging from those countries is well worth scrutinizing.

Over all of 2012, China consumed 832.19 tonnes. For the first half of that year, China accounted for around 460 tonnes. Compare that to this year, where in the first half alone China has gobbled up 706.36 tonnes.

From Reuters:

“China bought a lot when prices fell below $1,350 in April thinking it will not fall further,” said Chen Min, precious metals analyst at Jinrui Futures in Shenzhen.

“They bought much more than usual in April and May to meet the need for later in the year.”

Chinese Investors Hold Off on Uncertainty

Chen Min’s statement makes sense, since April’s when gold fell over two days by the most in three decades. Of course, June saw it dip below $1,200, but negative sentiment abounds, and the gold market remains extremely volatile.

One major reason is that the U.S. Federal Reserve is widely expected to begin tapering off its asset-buying stimulus program sometime this year or early next. However, the Fed is also undergoing major personnel and strategic changes, and there’s an ongoing debate as to whether Lawrence Summers or Janet Yellen will take the helm at the Fed after Bernanke’s departure.

Indeed, some have questioned why Bernanke is departing at just this point in time, when there’s still the major work of untangling the stimulus. As a result, and because the Fed has not issued any clear timeline, U.S. markets in general are unstable.

This has translated to other key indicators, which have slumped a bit, thus engendering more worries about the pace of the American economic recovery.

Now, if China goes all the way and hits 1,000 tonnes of gold this year, that would place it handily ahead of India, according to the World Gold Council. Aiding China is the fact that it’s also expected India will end up consuming a little less gold this year, largely due to the government’s newly-implemented restrictions on gold imports. Last year, India consumed 860 tonnes.

Although China does not release actual figures on gold consumption or imports, the data emerging from trade groups and from Hong Kong (which is a major Chinese supplier and does release figures) suggest that China is very likely to become the world’s largest consumer of gold within a few months.

Nonetheless, the ongoing uncertainty in gold markets—and the U.S. markets—has Chinese consumers staying afar. Once stability is achieved, though, expect China to become a gold heavyweight.


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