LAUNCESTON, Australia – (Reuters) – With gold demand slumping to the lowest in four years in the second quarter, bulls are grasping to hold on to anything positive and right now that means India and China.
If there was a bright spot in the World Gold Council’s (WGC)quarterly report, it was that demand in the world’s top two consumers surged.
India regained its lead over China by buying 310 tonnes in the second quarter, up 71 percent from the same period in 2012 and 21 percent above first quarter purchases.
China bought 275.7 tonnes in the second quarter, a jump of 87 percent from the same period last year, but 6 percent below the first quarter’s demand.
But even the strong demand in the Asian giants wasn’t enough to offset the dramatic outflows from exchange-traded funds (ETFs), which saw 402.2 tonnes of sales, more than double the 176.5 tonnes that flowed out in the first quarter.
This meant that total gold demand was 856.3 tonnes, a drop of 12 percent from the same quarter of last year and the lowest three-month total in four years.
The WGC report shows why gold plummeted in the second quarter, with the spot price plunging more than 25 percent from a closing price of $1,584.70 an ounce on April 9 to a three-year low of $1,180.71 on June 28.
While there has been a recovery since then to the current price of around $1,368 an ounce, there remain risks to saying prices will recover further on the back of Indian and Chinese buying.
Firstly, one has to assume that gold ETF outflows will diminish, and while it’s true that the net selling has slowed from the pace of the first half, it looks like the third quarter will produce another negative number.
Another bearish factor is slowing central bank purchases. These were still positive at 71.1 tonnes in the second quarter, but this was the lowest in two years and about half the rate of buying in 2012.
However, if one assumes that between them ETF flows and central bank purchases will be more or less neutral, the driver of the gold market really becomes India and China.
Graphic of India’s gold demand: link.reuters.com/seq99t
Link to WGC quarterly report website: link.reuters.com/hyt42v
PURCHASING POWER
The WGC believes that demand in India could reach a record 1,000 tonnes this year, and given that it was 566.5 tonnes for the first half, this doesn’t seem unreasonable, especially with the upcoming festival and marriage season.
However, the Indian government wants to limit gold imports to no more than 850 tonnes, and has once again taken steps to try to crimp buying.
These include raising the import tax to a record 10 percent, banning imports of coins and medallions, making buyers pay cash and stipulating that 20 percent of all imports must be used for exports, usually as jewellery.
In common with the WGC, many Indian gold traders believe demand remains resilient, even in the face of government measures.
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