Chinese Demand Could Power Gold To New Heights

The effect of heavy price weakness in recent months means that gold remains very much out of vogue with investors. The metal has conceded 22% since the start of the year, and near-three-year lows hit around $1,190 per ounce last month resulted in many commentators predicting further losses and a catastrophic fall back below $1,000.

However, this ‘doomsday’ scenario has failed to materialise, and instead gold has recovered back towards the $1,300 marker. This is not the first time this year that gold has demonstrated such resilience following bouts of intense selling.

And I believe that the scene is set for gold to thrust higher again, as the strength of physical gold demand in Asia — exemplified by massive dip-buying in recent weeks — allied with enduring macroeconomic uncertainty providing the catalyst. Investors can profit from this scenario by purchasing SPDR Gold Trust (NYSE: GLD.US) and Gold Bullion Securities (LSE: GBS).

Chinese gold flying off the shelves

Data from the Shanghai Gold Exchange released this week showed physical gold deliveries hit 1,098 tonnes in the first six months of 2013, just shy of the 1,138 tonnes shipped in the whole of 2012. Indeed, the rising popularity of gold with consumers across Asia has prompted both Deutsche Bank and UBS to open vaults in Singapore in recent months to service local customers.

China has now displaced India as the world’s foremost gold market, and World Gold Council (WGC) figures show that the country was responsible for a third of total physical demand in January-March.

India still accounted for 28% of aggregated global demand in the quarter, meanwhile, and the organisation reckons that second-quarter demand could hit fresh records between 300 and 400 tonnes. This is despite the introduction of fresh import taxes designed to discourage buying activity.

Around 72% of total gold demand comes from consumers buying bars, coins and jewellery, the WGC estimates. And Asian appetite for the yellow metal is showing no signs of abating — “Jewellery shops in China and India have run low or in some cases [are] completely out of stock”, it says. This bodes well for the metal price.

Regional concerns to underpin buying activity

And signs of slowing activity in the growth engines of the Far East are likely to keep local investors interested in the metal.

Data earlier this week showed Chinese GDP rise 7.5% in April-June, the third consecutive quarterly fall. Additionally, fears of rising inflation in China were stoked again last week when latest consumer price index (CPI) numbers showed inflation leap to 2.7% in June from 2.1% the previous month.

Further afield, questions over the timing of monetary tightening in the US remains somewhat of a mystery. Meanwhile, enduring economic weakness in Japan and the eurozone are likely to keep central bank actions extremely accommodative and thus global inflationary concerns on the boil. And with political strife in Europe likely to hot up in the coming months, expect gold prices to resume an upward path in the near future.

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> Royston does not own shares in any of the companies mentioned in this article.