Why China Is Set To Drive Gold Prices Skywards

The strength of gold bar, coin and jewellery demand across Asia helped gold to rebound from three-year troughs below $1,200 in the summer. Looking further ahead, in my opinion the prospect of accelerating physical demand from these regions — and in particular China — combined with enduring difficulties in the world economy, provide the perfect melting pot for gold to rise strongly.

And if, like me, you believe that gold is ready to stage another surge to the upside, in my opinion SPDR Gold Trust (NYSEMKT: GLD.US) and Gold Bullion Securities (LSE: GBS) are an excellent way to pocket gold-lined gains. These exchange-traded funds (ETFs) are designed to follow movements in the metal price.

Chinese demand set to soar higher

According to the World Gold Council (WGC), surging physical demand from China is set to push total purchases to more than 1,000 tonnes for the first time this year. Such a development would push India into second spot as the planet’s largest consumer, although purchases here are also expected to rise to around 1,000 tonnes in 2013.

According to media reports, Albert Cheng — the organisation’s Far East Managing Director — added said that he anticipates growing Chinese demand to move in line with  wider economic growth in the country. In particular, the effect of an increasing population and rising disposable income levels are set to bolster demand for gold jewellery, the executive said.

Latest proposals from the People’s Bank of China to relax gold trading rules could help the WGC’s prediction of surging domestic demand to become a reality. The plans would boost the number of firms allowed to import and export the metal, as well as increase the amount individuals can bring into China, without having to pay tax or report to customs, to 200 grams.

Flaky macro outlook ready to push gold higher

Although gold prices remain significantly down from those at the start of the year — the yellow metal was recently trading at $1,350 per ounce versus around $1,660 at the turn of the year, an 18.5% decline — prices have received a boost in recent weeks as macroeconomic concerns have again resurfaced. The safe-haven asset has risen more than 5% in the past fortnight alone.

Gold has received a boost as expectations of the US Federal Reserve keeping its quantitative easing measures rolling into the considerable future has increased inflationary expectations, a supportive backdrop for gold. It has also highlighted the fragile state of the global economy which, combined with patchy data from North America, Europe and China in recent days, has confirmed gold’s position as a popular flight-to-safety asset in troubled times.

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> Royston does not own shares in SPDR Gold Trust or Gold Bullion Securities.