World Gold Council: China gold market: progress and prospects
Comment of the Day

April 16 2014

Commentary by David Fuller

World Gold Council: China gold market: progress and prospects

This very comprehensive report will be of interest to anyone who trades or invests in gold.  Here is a brief sample:

Domestic gold supply consists of mine production and recycled gold. Although local supply has risen substantially in the past decade it has been outpaced by the growth of domestic demand. As a result, the Chinese market has swung from a small ‘surplus’ to a massive ‘deficit’, resulting in a huge rise in gold imports. Although China’s bullion imports

are distorted by gold required for purely financial operations and possibly, too, official purchases, the underlying increase in gold shipments to the country is genuine and related to real growth in demand from consumers and investors.

David Fuller's view

China’s official government policy on gold aside, its citizens like to buy yellow metal, especially when the price weakens.  It is the same in India, even though the government introduced measures last year to curb demand for gold.  India imported 845 tonnes of gold in 2012-2013, according to the finance ministry.  This caused the current account deficit to surge and weakened the rupee.

Most people are interested in gold because of its historic role as a store of value, its beauty and unique qualities.  However, investors in the west have been more interested in gold as a momentum play, at least during the last several decades.  You can see this by looking at these charts of Total Know ETF Holdings of Gold (weekly & daily). 

While ETF holdings of gold are a lagging indicator, a clear upturn on the chart above, including a sustained break above the 200-day MA, would provide confirming evidence that gold bullion in USD (weekly & daily) had reached a sustainable low for at least the lengthy medium term in June 2013.  The best argument against this, in my opinion, is that gold bullion only peaked just over two and a half years ago in September 2011.  In other words, gold has been out of favour for a comparatively short period relative to its bull run from 2001 into 2011.  Does this matter?  Yes it does, judging by the duration of bear trends when many other long-term bull trends have peaked.  

I see no reason not to believe that gold will remain a long-term store of value, not least in a world of fiat currencies.  However, a further retracement of this year’s rally to date would progressively increase the odds of another downward break. 

Here are two other articles which may interest you: Gold Tumbles Most in 16 Weeks on Fed Taper Speculation, and Gold Import Curbs Seen Continuing in India to Protect Currency.

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