Will Falling Demand from China Adversely Impact Gold Prices?
Increasing gold premium
Gold has reached a ten-month low, with the federal interest rate pushing the yield-bearing precious metals lower. The slide in the precious metals started after Trump’s victory, due to the rising US dollar. The drastically lower gold prices could have led to an increase in demand, but this did not happen.
The demand for gold has been weak in India and China. The cash crunch in India contributed to the falling demand. In an attempt to constrain the outflows of the Chinese yuan, the Chinese have curbed the import of gold. The yuan was the weakest it’s been in almost eight years. According to the Shanghai Gold Exchange, China allows only 13 banks, including three foreign lenders, to import gold. Gold premiums in China surged to their highest in nearly three years, likely due to the supply shortage.
The largest gold market
According to Thomson Reuters, gold premiums in China have risen to $40 from $28–$30 the week prior. The higher gold premiums deter investors from gold. As Asia is the largest market for gold, the falling demand can result in a more negative sentiment.
Gold-based funds that have been impacted by the negative sentiment in gold include the Sprott Gold Miners ETF (SGDM) and the iShares MSCI Global Gold Miners ETF (RING). The mining shares affected by the precious metal include Eldorado Gold (EGO), Alacer Gold (ASR), IAMGOLD (IAG), and Kinross Gold (KGC).
India’s Top Bank in Limelight, Investors Stay Away from Gold
As India moved to replacing its higher-denomination notes, the impact was far felt. The country’s tax authority is making a list of dealers that they believe could be involved in suspicious activity. The ban on gold imports after the demonetization has put many dealers in danger.
Axis Bank, India’s third-biggest private sector lender and the top gold importer during the past week, is familiar with the consequences of money laundering. Several jewelers’ and gold dealers’ deposit accounts were frozen, and activities were suspended. 19 employees were involved in “black money” laundering after the demonetization deadline. The bank has suspended the accounts of some precious metal dealers and jewelers after two executives were arrested for money laundering.
Although the added insecurity in the market could lead to gold purchases, investors fear that the government’s anti-money laundering steps could target gold and impose further restrictions.
The gold market is likely experiencing a drought. Money has stopped flowing to favourite funds such as the SPDR Gold Shares ETF (GLD) and the iShares Silver Trust ETF (SLV). These two funds saw significant outflows.
The demonetization in India also impacted gold prices, as there were higher premiums paid for gold in exchange for the banned currency notes. Premiums as high as 50% on ten grams of gold were witnessed during the start of demonetization in India. Although the country’s demand and import figures had a minimal immediate impact on the market, a longer-term impact may be felt. Mining shares affected by gold prices include Sibanye Gold (SBGL), Gold Fields (GFI), Primero Mining (PPP), and Newmont Mining (NEM).
Could Central Banks’ Demand for Gold Rise?
Central banks’ gold demand could rise
The US federal debt is growing at a fast rate—it has even exceeded the GDP growth rate. Trump’s win of the election in November came as a surprise for investors. Gold increased initially, but later, it tumbled. The fall since Trump’s victory has been significant and affects gold-following funds such as the iShares Gold Trust ETF (IAU) and the Physical Swiss Gold Shares ETF (SGOL). When major central banks increase debt as a percentage of GDP, their gold holdings often rise.
Rising debt has an adverse impact on the economy. Anything that is negative for the economy could be positive for gold prices. In turn, anything positive for gold could be value-adding for mining shares such as Barrick Gold (ABX), Goldcorp (GG), Yamana Gold (AUY), and Coeur Bank (CDE).
According to Valuewalk, the US debt is $67 trillion, nearly 400% of GDP. Investors can compare GDP versus debt to understand whether the country can make its future payments. Trump is planning to increase the country’s spending on infrastructure, which may add to the nation’s debt. Higher debt is also negative for the US dollar, and a fall in the dollar could trigger an increase in gold prices, as gold is a dollar-denominated asset.
– Meera Shawn
As Investors Flee Gold Central Banks Are Buying
– Rupert Hargreaves: It has been a tough year to be a gold investor. The price of gold has whipsawed throughout the year on the back of changing interest rate expectations and political uncertainty. Indeed, as uncertainty grew throughout the first half of 2016, gold prices pushed steadily higher from around $1,075 an ounce at the beginning of the year to a high of just under $1,400 an ounce after the Brexit vote.
However, over the past six months as uncertainty has faded and the global economy has surprised to the upside, gold prices collapsed, falling to a low of $1,136 an ounce at close on Friday.
According to HSBC investment demand for gold has also collapsed during the second half of 2016. The 84 global gold exchange traded funds tracked by the bank’s commodities analysts reported a decline in gold holdings of 3.9 million ounces during November, the highest monthly outflow since May 2013. Gold prices declined by 7% in November 2016, compared to a 5% drop in May 2013. SPDR, the largest gold ETF globally, shed 1.9 million ounces of gold during November, contributing close to half of the total ETF outflows for the period. Still, on a net basis ETF buying for the year is 20.3 million ounces, the largest annual ETF gain since 2010.
While investors were net sellers of gold during November, HSBC’s research also shows that central banks are gobbling up excess supply. The bank tracks gold holdings as reported in arrears by the International Monetary Fund’s International Financial Statistics on a monthly and annual basis with a focus on the top ten gold holders who represent c79% of global holdings. Per data from the World Gold Council, global central banks accumulated a net 33.7t of gold in October vs.13.7t in September, the highest since January 2016’s 35.5t. Russia was the largest buyer accumulating 40.4t, closely followed by Qatar at 6.2t and China at 4.04t. Russia remains the largest gold buyer in 2016, increasing gold holdings by c168.5t to date, and substantially ahead of China, which has accumulated c80.3t of gold so far.
Meanwhile, figures from the Shanghai Gold Exchange, which give an indication of the trends in physical demand for gold sales in China showed that trade volumes of the physical metal more than doubled month-on-month during November after Donald Trump’s win of the US elections. Monthly trading hit 1.5kt surpassing the previous record of 1.2kt printed after the Brexit vote.
Please check back for new articles and updates at Commoditytrademantra.com
Demand for Gold , Gold Demand , Gold ETF , Gold Imports , Gold Investor , Gold Market , Gold Miners ETF , Gold Premiums , Gold Prices , Gold Purchases , Price of Gold , US Dollar