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Can Physical Gold Demand Sustain Its Prices in 2017 and Beyond?

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Aug. 21 2017, Updated 10:37 a.m. ET

China’s safe-haven buying

After staying away from the gold market at the end of 2016 and the first few months of 2017, Chinese gold consumers are back in the gold market. China’s gold demand increased ~10% year-over-year in 1H17. This increased demand was mostly backed by investment purchases as jewelry demand was virtually unchanged between January and June.

The Chinese authorities came down heavily to curb leverage in the system, leading to concerns about currency and property market risks. Investors most likely sought gold as a method of preserving value in the event of a market correction.

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China’s investment buying

The China Gold Association (or CGA) noted that physical gold is now playing a more important role in Chinese consumers’ investment portfolios. CGA noted that gold is acting as a store of wealth “as global markets become more fragile, the Federal Reserve raising interest rates, and increasing geopolitical uncertainty.”

CGA estimates that the demand for gold could exceed 1,000 tons in 2017, which would be its highest level of consumption in the last four years.

India’s gold demand

India’s gold demand also remained robust in 1H17. The world’s second-largest gold consumer’s demand was 37% higher year-over-year in 2Q17 to 167 tons. The World Gold Council (or WGC) believes that gold demand could reach 650–750 tons in India in 2017. It also believes that the demand in 2H17 could remain muted due to the impact of the newly implemented goods and services tax as people become accustomed to the next tax regime.

Gold purchases by the world’s two largest consumers usually support gold prices (GLD) and gold stocks such as Goldcorp (GG), Eldorado Gold (EGO), Franco Nevada (FNV), and Hecla Mining (HL). It also affects ETFs such as the VanEck Vectors Gold Miners ETF (GDX), which invests in these stocks.

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