Can China’s Gold Demand Sustain the Gold Price Momentum?
China’s safe-haven buying
After shying away from the gold market at the end of 2016 and the initial few months of 2017, Chinese consumers are back in the gold-buying game. China’s investment demand was robust in 1Q17 with sales of bars increasing more than 60.0%.
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China’s government is coming down heavily on the financial leverage in the system. That has led to concerns about currency risks and the property market outlook. Investors are finding ways to protect the value of their money and safe-haven assets in the event of a market correction. The Chinese Gold and Silver Exchange Society suggests that China’s gold imports from Hong Kong might increase about 50.0% this year. It could take the purchases from Hong Kong to the highest level since 2013.
Shanghai Gold Exchange withdrawals
Another measure of physical gold demand in China is the Shanghai Gold Exchange withdrawals. All the mined and imported gold in China can only sell through the Shanghai Gold Exchange. By tracking the data, investors can get a good picture of the short-term direction for demand in the country. According to the exchange, the withdrawals for May were 138 tons. For the first five months of the year, withdrawals were 829 tons. That’s in line with the withdrawals last year. Going by these figures, total withdrawals for 2017 could reach close to 2,000 tons.
Physical buying to the rescue
Historically, China’s physical gold purchases have supported gold prices in the weaker price trend. That’s mainly because Chinese consumers are price-conscious. It was physical buying by China and India that salvaged gold prices (GLD) after a massive fall in 2013. Precious metal companies such as Harmony Gold (HMY), Iamgold (IAG), Yamana Gold (AUY), and First Majestic Silver (AG) need higher precious metal prices to continue to exploit resources.
In the next part of this series, we’ll see how gold prices could be affected by India’s demand appetite, especially given a new tax initiative there.