Daily Nugget: India Still Tops China’s Gold Demand

Gold futures prices climbed this morning thanks to a weak US dollar and inflows into gold-backed ETFs.

This morning the spot silver price has broken through the key resistance of $22.00.

Yesterday various releases across the Eurozone and US set tongues wagging about the economic recovery but was unable to provide conclusive evidence.

The US data showed yet another month of weak inflationary pressure; producer prices missed expectations and the overall inflation rate for the year-to-date was 2.1% rather than the predicted 2.4%.

Jobless claims out this week are expected to show a small climb in the number of those claiming unemployment allowance, following a five-year low last week.

The low levels of inflation and concerns, as expressed by Fed President Bullard, have now prompted speculation that the US may not end stimulus as soon as at previously been thought.

Fed President wants more inflation

We appear to be seeing a gradual shift in interest over tapering timing to inflation levels. Yesterday St Louis Fed President James Bullard commented that the Federal Reserve is at risk of losing credibility should it not hit its 2% inflation target. Bullard has, previously dissented from policy statements stating that he wanted to see further commitment that the FOMC would ‘defend its inflation goal.’

Eurozone back from the brink?

Yesterday the Eurozone officially exited its six-quarter recession. But not all is as well as it seems, whilst the headline data suggests a recovery is on its way many of the countries involved have failed to address the underlying issues.

ETF outflows see gold demand down

Global demand to buy gold was down 12% in Q2 this year, on the same period last year. The fall is due to ETF outflows, according to the World Gold Council. Holdings in the SPDR Gold Trust, the largest gold-backed ETF saw net-outflows of $18.5 billion in the second quarter following sales from the likes of Paulson & Co who cut its stake in the Trust by 53% and Soros who dumped nearly 531,000 shares.

However, given our research into ETFs, and conclusion that they are not a good measure of physical gold demand we believe it is more important to note the record demand for coins, bars and jewellery. The latter saw demand hit a five year high. Demand for bars and coins in the first half of 2013 is already three-quarters of that in 2012 or 53% higher than one year ago. we should also note investors like Soros repositioning more aggressively into other gold investment products and vehicles – such as into junior mining shares or derivatives based on them.

Catching onto what so many commentators in this space have been arguing, the WGC outlined the shift from West-to-East of physical gold.

Marcus Grubb does not believe that ETF outflows signalled a fall a demand, instead it was reabsorbed by both India and China who saw demand climb in Q2 by 71% and 82% respectively.

Not all demand was down to opportunistic individuals, but also from those in the trade who used the fall in price to stock up on inventory.

The WGC note the unusual nature of China gold demand in Q2, traditionally Chinese gold buyers buy when there is an uptrend and during festival periods. However, as we noted in our research into the White Hot Chinese Gold Market, investors now appear more price sensitive when it comes to gold investment.

India and China accounted for 120 tons of the increase in jewellery demand, the additional 35 tons came from the Middle East and elsewhere in Asia.

The WGC also commented on the possibility that China may beat India as top gold buyer. In the second quarter India bought 310 tons compared to China’s 294.6 tons, interesting to note given the additional import charges facing Indian buyers. Both countries’ demand for the yellow metal is expected to top 1000 tons this year.

However for the first half of the year China purchased 600 ton compared to India’s 566 tonnes. Both countries increased purchases by over 45% between January and June. The Council believes India, despite restrictions, will up gold purchases in the second half of the year due to the Diwali celebrations.

Central bank buying was down, just 71.1 tons of gold was bought in the second-quarter compared to 164.5 tons in the same period last year. The WGC expect central banks to remain net buyers of gold.

Whilst China and India embraced the fall in the gold price, on area that did not benefit was global gold supplies which contracted 6% last quarter due to a fall in recycling supply which fell by 21%.

In the first half of the year just 672.1 tons of recycling supply was available, a level not seen since 2007.

The fall in the price has also seen a quick response from gold producers who have moved swiftly to cut costs and close mines. The WGC believe this will play through to affect supply levels in the coming months.

Canadian gold demand

Confirming trends reported by the World Gold Council earlier today, an official from the Royal Canadian Mint said that demand for coins has been ‘very strong’. In the second-quarter the mint had ‘record volume for silver Maple Leafs [highest in 25 years of production]…and near-record volume, only second to 2000, year-to-date, for our gold Maple Leafs.’ As told to Kitco.