Investors and analysts who are downcast about the recent big drop in gold prices have neglected the broader trend of unprecedented growth in physical gold demand from China, said the World Gold Council on Wednesday.
Despite a slight slowdown in China’s economy, gold imports there this year look set to far surpass last year’s record-setting imports of 776 metric tons for the full year, according to the council.
As of June 2013, China had already imported 500 tons, with total imports likely to weigh in at 900 to 950 tons by the end of the year, said the council’s managing director, Marcus Grubb.
“Quietly, the Chinese are buying a lot of gold right now,” said Grubb in an interview. “Basically, China is catching up with India, in terms of demand. You’re on a faster growth path in China.”
India’s ownership of gold per capita is still roughly twice that of China, but recently many Indian jewelers voluntarily agreed to stop selling gold bars and coins there for six months, just after the government raised gold import duties.
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Worrying outflows of gold from exchange-traded funds (ETF), mostly based in the U.S. and the U.K., often end up pouring more gold into China, said Grubb.
“Investors are buying gold as a hedge in China, a hedge against different [economic] scenarios that might happen,” said Grubb, citing uncertainty in China over inflation, stock markets and the export-led economic model.
Similar market uncertainty in the United States, however, over the timing and pace of the Federal Reserve’s potential cutback of bond purchases, has helped spur the exit of more than 600 tons of gold from ETFs here since January.
But Grubb argued that the recent price correction there is now over. “We think the adjustment has happened very quickly and brutally,” he said, acknowledging that there’d likely be an overall drop in gold prices by 2014, ending a gradual decade-long price uptick, from $200 per ounce in 2000 to $1,800 per ounce in 2012. “But this is a market where it’s very clear: The physical demand for gold is extremely strong.”
“Where we are now is a transition where you’re restoring balance to the gold market,” he said. “If you look longer-term, the picture for gold is still pretty good.”
He cited tightened gold supply and production at mines, continued central bank interest in gold reserves, and 300 fewer tons of gold recycling as factors.
But in a research note from Monday, Barclays gold analysts said that serious economic deterioration in the U.S. is needed to push gold prices significantly higher. They forecasted a gold price of $1,393 per ounce by the end of 2013.
Barclays cited an Indian government official who said that gold imports there fell 80 percent in June compared to May.
“Gold prices have firmed over the past week, buoyed by the dovish June FOMC [Federal Open Market Committee] minutes and the subsequent weaker dollar,” the Barclays analysts wrote. "We believe the recent rally is likely to be short-lived.”
Even if gold overcomes short-term threats, it could face a more serious, existential threat from digital currencies like bitcoin in the long term, wrote MarketWatch commentator Matthew Lynn on Wednesday.