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All-important ETPs stop selling gold as World Gold Council reports lower Q1 demand in China and India

 -- Published: Wednesday, 21 May 2014 | Print  | Disqus 

By Peter Cooper

The first quarter for gold was a mirror image of a year ago with almost no selling by the exchange traded products and falling demand in China and India, according to the World Gold Council.

China bought 18 per cent less gold, with gold bar and coin purchases tumbling 55 per cent while Indian consumption was down 26 per cent. The sudden price rise in January probably put off opportunistic buyers who had swooped on bargain prices in the sell-off by the ETPs last year. Indian demand fell due to higher taxes on gold but total UAE demand was up 16 per cent mainly because of buying by Indians for personal export.

Profit taking

The WGC commented: ‘A degree of profit-taking also contributed to the year-on-year decline. The opportunistic buying that accounted for a portion of last year’s surge resulted in some of these relatively tactical buyers closing out of their positions as the price rose over the course of the quarter.’

On the other hand, the ETPs that sold 840 tonnes of gold last year dropped their holdings by a mere twentieth of a tonne in Q1. It is a spectacular turnaround.

Last year’s 32 per cent fall in the gold price showed that ETPs are far more important in determining the gold price than physical demand from China and India, although this undoubtedly helped to mitigate the price correction which would have been far worse otherwise.

The ETPs have stopped selling and are back in control of the market and this should be interpreted as a bullish signal for gold. In January gold prices advanced sharply as stock markets went through a mini-correction and investors turned to gold as an oversold safe haven asset.

Autumn rally?

The stage is thus set for a much larger rally in the gold price as stocks enter a major correction phase with investors rotating out of stocks and into safe havens like treasuries and gold. This would be a different scenario for gold to the 2008-9 crash. But then gold has already been through a price correction rather than sitting at the top of its cycle as it was in 2008.

Moreover much of the huge amount of gold that the ETPs sold last year is now sitting in vaults in China and what goes into that market cannot return as exports of gold are banned. That means if the ETPs now shift from a hold position and start buying then there will be shortage of gold.

Excess demand over supply equals higher prices!
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 -- Published: Wednesday, 21 May 2014 | E-Mail  | Print  | Source:

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