Some think gold’s rally is over. Maybe it is. Others are holding on for all kinds of reasons. One of those reasons is demand from India and China. But this dynamic is less straightforward than it sounds.
Since China deregulated gold buying in 2002, the country has come from virtually nowhere to become the world’s second largest and, on occasion, largest gold buyer. India has been in the fray for longer. The two countries made up 55 per cent of gold bar and coin purchases in the first quarter, up from 46 per cent a year ago, according to the World Gold Council. Both add important features to gold demand. As BullionVault notes, they are more interested in physical gold buying over the type of investment demand driven by exchange-traded funds in the US and Europe. And contrary to the belief that the Chinese only buy in a bull market, both countries look increasingly like opportunistic buyers. As prices started to fall coming into 2013, gold bullion sales to China surged by more than half in the first quarter from a year earlier and those to India jumped a fifth. The two countries also display seasonal swings in demand (lunar new year in China and Diwali in India, for example). And demand in both has further to go. The lack of investment choices and a risky financial system make demand for gold in China particularly attractive.
All that sounds like gold is a one-way bet. But no. Although ETFs contribute barely 10 per cent of net gold demand, their performance has the biggest swing on prices. Hence, the net sale of 200 tonnes of gold by ETFs in the first quarter dragged down prices. The reality is that buying physical gold takes longer to feed through to prices. Nor is India a one-way bet. Because gold buying is boosting the trade deficit, the central bank has slapped restrictions on gold imports by the banks. The demand picture for gold is far from clear.