Gold price: Great sucking sound now coming from the West

Tepid demand in Asia as money pours into physical gold-backed ETFs

On Thursday Gold was holding onto recent gains adding a couple of dollars in New York in another day of heavy trading.

At $1,244.40 an ounce, gold is up 17% since the start of the year, boosted in no small part by ETF investors who've been stocking up on the metal.

In fact, physical gold-backed funds have seen net inflows of more than 200 tonnes so far this year.

At the current pace, Q1 2016 could top the torrid June quarter in 2010 when nearly 300 tonnes were added to ETF vaults.

This year has been a reversal of the trend in during the last three years when a staggering 1,198 tonnes left funds.

This outflow was primarily a West to East movement. The process played itself out  like this:

A rupee gold price at a two-and-half year high certainly hasn’t helped

ETF investors in the US and other developed markets offload their gold holdings allocated to them and held in the UK, where most of the world's gold vaults are to be found.

From the UK the bullion is exported to Switzerland where the globe's gold refineries are concentrated, where it's melted down and recast into smaller bars.

Then the bullion is shipped to China and India and other growing gold consuming nations in Asia led by Vietnam and Indonesia.

Buyers in Asia were also willing to pay high premiums for this gold – Shanghai premiums topped out at $37 an ounce above the London fix. Today it hovers around par.

In India it hit highs of $170 above when government import restriction panic coincided with Diwali in 2013. Today it hit another record – a $40 discount. A rupee gold price at a two-and-half year high certainly hasn’t helped.

The lack of demand is also evident in import volumes.

In January this year net imports into mainland China from Hong Kong was the smallest since 2011 at a mere 17.6 tonnes.

Indian bullion imports of 60.7 tonnes in January was 55% below December’s total and the lowest level since October. There’s plentiful local metal available after a surge in doré imports to feed a doubling of refining capacity on the sub-continent last year.

Gold price: Great sucking sound now coming from the West
Image by Eric Kim