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A week in gold: China again to the fore

April 19, 2014

London (Apr 19)  Gold had a mixed week ahead of the Easter break, but the outlook for the price remains unpromising according to the latest survey from Thomson GFMS.

For 2014, GFMS forecast the gold price will average US$1,225, 13% lower than 2013 and 6% down on the current level, with lows expected mid-year and a rally towards the end.

Physical demand rose to an all-time high of 4,957 tonnes, up 15% over 2012 and 703 tonnes higher than the supply of new gold and scrap during the year.

Demand is again forecast to outstrip new gold plus scrap supply in 2014, but the market is expected to be much closer to fundamental balance, GFMS said.

“Thomson Reuters is expecting a downward drift to resume through the middle of the year as investors concentrate on US monetary policy and as Treasury yields rise, while the prospects of economic recovery also point to equities as a more attractive asset class than gold.

“Over the longer term this backdrop points to further declines during 2015, but there are caveats here.”

It sees pent-up demand from consumers below $1,200 but an evaporation of interest above US$1,300 suggesting a high degree of elasticity at the moment.

The wild card is India and the possibility that an easing of the import restrictions may "unleash further fresh demand" to lift the gold price.

India was overtaken by China in 2013 as the largest market for gold, but some of the weakness in the price this week stemmed from another piece of research, this time from trade body the World Gold Council.

Though the WGC predicted China's demand for gold is set to rise over the next few years, as the population becomes more wealthy, it said there may be a short term dip as current demand struggles to match last year’s record.

Chinese consumers snapped up 1,132 tonnes of gold last year in the form of jewellery, bars and coins for investment.

The WGC report also highlighted that as much as 1000t of gold could be tied up solely in Chinese financing deals, with gold being used as a form of credit.

This is a significant concern for gold markets according to broker Investec: “Since unwinding such material inventories could prompt unwinding of other physical gold holdings such as ETFs that could have a material impact on the gold price.

“We wait to see how Chinese policy evolves and whether the gold can gradually be consumed by the jewellery market.”

The WGC expects private sector demand for gold in China to increase by 20% to 1,350tpa by 2017.

As US markets opened Thursday, spot gold was trading around US$1,200, about US$23 lower on the price the previous Friday.

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