How the Physical Gold Demand Translates to Prices
Physical gold demand
India and China make up ~50.0% of the global demand for physical gold. These markets are price-sensitive, so when gold prices fall, physical gold-buying in these markets provides support for gold. In this part of the series, we’ll see if demand from India and China could accelerate in 2017.
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Indian gold demand picking up
India’s demand for gold has been subdued for the last couple of months, mainly due to demonetization. Its demand in 2016 was the weakest since 2009. Demand, however, is recovering from that seven-year low.
As reported by Bloomberg, gold imports by India may have risen nearly 582.0% to 120.8 metric tons in March 2017 compared to the same month last year. Jewelers could be restocking ahead of the wedding season. Many market participants feel that the issues related to purchases due to demonetization are subsiding.
While gold demand was ~600.0 tons in 2016, the World Gold Council (or WGC) expects it to reach 650.0–700.0 tons in 2017.
China’s gold imports for 2016 totaled ~1,300 tons, a 17.0% year-over-year fall. Shanghai Gold Exchange (or SGE) gold withdrawals were at their lowest in four years. To stem the fall of the Chinese yuan against the dollar, China is believed to have restricted gold imports through quotas allotted to banks. The move has weakened the ability to purchase gold in the country.
However, demand has still been quite strong so far in 2017. The combined figures for January and February 2017 for SGE withdrawals imply an increase of 9.3% year-over-year.
The WGC believes that both of these markets will continue to drive gold demand despite short-term headwinds. In the medium to long term, the cash crunch in India should ease, and China could lift its restrictions. These developments could support gold prices (GLD) as well as gold miners such as Sibanye Gold (SBGL), B2Gold (BTG), Primero Mining (PPP), and Alacer Gold (ASR).