Not even renewed physical gold demand from India and China,the world’s top buyers,appears to be enough to spark the precious metal’s rally,but may be sufficient to stem further losses.
It should be abundantly clear to the gold bulls by now that the three main factors that drove the metal to its all-time high of $1,920.30 in September 2011 were an unusual combination,rather than the harbinger of further gains.
At that time gold was rallying because Asian physical demand was strong due to rising wealth and higher-than-normal inflation in China and India,Western investor flows into exchange-traded funds (ETFs) amid fears over excessive monetary easing and recession in developed economies,and unprecedented central bank buying.
Since then,all three factors haven’t been present at the same time,causing gold to trend modestly lower to around the $1,600 an ounce mark,before it plunged 17 percent in the first two weeks of April to hit a two-year low of $1,321.35.
Firstly,Asian demand eased as China and India’s economic growth eased and inflation dropped,with Indian demand slumping 11 percent in 2012 and China’s growing a tepid 1 percent.
Secondly,ETF investors finally gave up waiting for the much-promised,by many analysts at any rate,rally to above $2,000 an ounce and started liquidating holdings.
The SPDR Gold Trust,the largest gold-backed ETF,saw holdings plummet to a four-year low of about 1,041 tonnes on Thursday. The holdings hit a record high of about 1,233 tonnes in December last year.
Lastly,central bank buying stopped rising,with World Gold Council data on Thursday showing first quarter net purchases at 109.2 tonnes,the lowest since the second quarter of 2011 and well below the 133.3 tonnes quarterly average in 2012.
The WGC report shows very neatly the rotation of influences of positive and negative factors driving gold prices that I wrote about on Feb. 18,with Asian physical demand picking up while ETF demand wanes.
China maintained its place as the world’s top buyer of gold,with first quarter demand of 294.3 tonnes,a very strong 45 percent gain from the fourth quarter of last year and 20 percent up from the same period a year earlier.
India’s consumption fell 2 percent in the first quarter to 256.5 tonnes from the fourth quarter,but was 27 percent higher than the same quarter last year.
Together,gold demand in the two Asian giants is up 18.6 percent in the first quarter of 2013 from the last quarter of 2012,and by 23 percent from the same period a year earlier.
However,ETF holdings plunged by a record 176.9 tonnes in the first quarter,having risen by 88.1 tonnes in the last quarter of 2012 and by 53.2 tonnes a year earlier.
The ETF outflow was behind most of the drop in total gold demand to 963 tonnes in the first quarter,the lowest in three years.
But it wasn’t the whole negative story for gold,with demand dropping by 48.3 tonnes in the first quarter from the fourth quarter of last year — the bulk of which is accounted for by lower central bank net purchases.
The bad news for gold bulls is that ETF redemptions have continued unabated since the end of the first quarter,with the SPDR losing 72 tonnes since the start of April,compared with about 120 from the peak in early December to the end of March.
So where does gold go from here?
It’s clear that renewed physical demand in India and China isn’t enough to trigger a major rally,especially if ETF holdings continue to sink.
However,if ETF holdings start to stabilise,then physical demand could see prices push higher,but gains to $2,000 an ounce is well out of reach,and even the pre-April price of $1,600 may be optimistic.
A stronger U.S. dollar on the back of brighter prospects in the world’s biggest economy,coupled with an easing of financial meltdown fears in Europe will limit gold’s investment appeal in the developed world.
Lower economic growth in India,coupled with central bank efforts to limit gold imports to try and lower the current account deficit,probably mean demand in the South Asian nation won’t rise much more.
China remains the best hope for gold,with lower prices clearly tempting buyers.
But gold can’t hope to rally with two of its three legs wobbly,and the one good leg,namely Asian demand,isn’t enough to offset weak investment demand and waning central bank buying.
At least one of these two bearish factors will have to ease,or at least stabilise,if prices are to gain any traction.