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Physical Gold Demand Remains Buoyant, Supporting Gold Prices

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Feb. 29 2016, Updated 8:05 a.m. ET

Physical demand strong

The World Gold Council’s (or WGC) latest reports for fourth quarter demand show that the demand for gold bars and gold coins has been strong. Demand for jewelry, bars, and coins totaled 934.9 tons, which is nearly the same as the 4Q14 total of 938.3 tons. The demand exceeded its five-year average of 913.8 tons, led by two main buyers—China and India (INDA) (EPI).

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Chinese piling up on gold

China’s physical gold demand, as shown by imports from Hong Kong, has been exceptionally strong. China imported 111 tons of gold from Hong Kong in December 2015, which is the highest monthly number since October 2013. It also implies an import growth of 89% year-over-year (or YoY) and 67% month-over-month.

Investors in China are looking at other investment alternatives as domestic equity markets continue to slump and as the yuan continues to be devalued.

Indians not far behind

India’s gold imports for December 2015 totaled $3,806 million, up 179% YoY. This is despite the government’s efforts to curb imports that result in increasing trade deficit for the country. The government of India had introduced schemes such as the gold monetization scheme and the sovereign bond scheme last year to reduce gold imports and the current account deficit.

Mining investments

The rise in gold also boosted investments in mining-based ETFs such as the VanEck Vectors Gold Miners ETF (GDX) and the leveraged Direxion Daily Gold Miners ETF (NUGT).

Mining-based stocks that have risen in price include Agnico-Eagle Mines (AEM), Newmont Mining (NEM), and Primero Mining (PPP). These three stocks together make up 11% of GDX.

Gold ETFs are another vehicle for channeling investments in gold. We’ll look at the recent action in gold ETF holdings and money managers’ positions to examine the market sentiment toward gold.

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