On Tuesday gold continued to trade sideways with December futures trading on the Comex market in New York exchanging hands at $1,270.50 an ounce. While down more than $100 an ounce from two-year highs touched in July, year to date the metal is still managing gains of nearly 20%, one of its best annual performances since 1980.
Gold’s run-up in 2016 is largely thanks to investors in developed markets snapping up tonnes in listed physically-backed gold ETFs and large-scale speculators on gold derivatives markets placing record-setting bets on a higher gold price (although that trend’s moved into reverse recently).
Largely absent from the rally has been the world’s two top physical buyers of the metal, India and China which together represent more than 50% of global demand. Indian imports have all but collapsed – down 59% year to date to a mere 270 tonnes compared to nearly 1,000 tonnes during good years.
Chinese buying has held up better, but mainland gold imports from Hong Kong, fell 23% in August to their lowest level since January and gold jewellery purchases are down 15% year to date.
Quoted by Bloomberg, a new report by Goldman Sachs says China’s appetite for gold may start to increase with the fall of the renminbi to record lows against the dollar:
“The potential drivers of increased Chinese physical buying include purchasing gold as a way to hedge for potential currency depreciation in the face of capital controls,” analysts including Jeffrey Currie and Max Layton, wrote in a report dated Oct. 24. Bullion consumption in China may also rise “as a way of diversifying away from the property market,” they said.
Chinese physical gold exchange-traded funds holdings “have increased further, and appear correlated with recent yuan depreciation,” the analysts said. “Should the recent decline in property prices in October and yuan depreciation continue we may see Chinese gold investment demand respond.”
While still tiny (not much more than 30 tonnes) compared to gold ETFs traded in New York, London and elsewhere, Shanghai-listed physically-backed funds have increased in size by ten times this year according to Yang Qing, deputy general manager in the global market department of Bank of China, quoted by the Financial Times:
“You can see that China’s investment demand has the potential to be astonishing,” [Yang] said this month at the London Bullion Market Association conference in Singapore. “The proportion of gold in ordinary people’s asset allocation will increase.”
Another sign of improving demand is the premium buyers are willing to pay over international prices. Premiums in China climbed to $6 an ounce over the ruling London price on the Shanghai Gold Exchange on Tuesday, even as the yuan reached new six-year lows on the forex market reports BullionVault.