LAUNCESTON, Australia, Feb 20 (Reuters) – Gold bulls have been tempted out of hiding by bullion’s strong start to the year, but the basis for optimism looks unsteady and largely hostage to what happens in China and India.
Spot gold has gained 8.8 percent so far this year to end Feb. 19 at $1,311.32 an ounce, recovering almost a quarter of its 28-percent loss in 2013.
The World Gold Council (WGC), which represents producers, is unsurprisingly upbeat, with Marcus Grubb, the managing director for investment, saying 2014 is going to be “much better” for gold investment and returns will be positive. Notwithstanding that the council’s job is to portray gold in a positive light, it’s worth looking at why it thinks this is the case.
It basically comes down to three factors, ongoing strong demand from China, a recovery in Indian imports as the government relaxes restrictions and an improvement in investment demand, reversing 2013’s huge outflows from exchange-traded funds (ETFs).
China became the world’s top gold consumer last year, overtaking India, with demand rising 32 percent to 1,065.8 tonnes, according to the council’s Gold Demand Trends report on Feb. 18.
The surge in demand in China was largely due to a consumer response to the sharp fall in prices.
Given that a further slump in gold prices is something the council doesn’t expect, it may be logical to assume that Chinese buyers will be aware that the time to buy at bargain prices is past.
Chinese consumers also tend to buy gold when they fear inflation is rising, or when other financial assets such as shares are likely to drop.
Inflation in China remains well contained at 2.5 percent, well below the recent 6.5-percent peak from mid-2011, while the benchmark Shanghai stock index is up modestly so far this year.
Premiums on the Shanghai Gold Exchange have also eased recently after the demand boost ahead of the Lunar New Year holidays at the end of last month and the start of February.
The current backdrop in China does little to suggest that gold demand will again surge by more than 30 percent in 2014, although equally it doesn’t suggest that demand will decline.
Rather the outlook for China is for steady demand growth, which will be supportive for gold prices, but not enough to spur a rally by itself.
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