Treasure Chest | Jan 29 2014
By Greg Peel
The Chinese man on the street, it is noted anecdotally, is buying a lot of gold with printed dollars and can’t understand why the rest of the world is just watching this happen. The Chinese are very positive on gold and expect the price to rise substantially.
The rest of the world is, of course, watching the Fed and weighing up the impact of QE tapering against potential strength in the US dollar – a mathematical headwind for the USD gold price. At the same time the world is watching the impact Fed policy is having on emerging market currencies and asset values, with recent plunges suggesting a reason perhaps not to sell out of gold just yet.
China recently became the biggest producer of gold and more recently has become the world’s biggest consumer, with the PBoC swallowing up Chinese production on the one hand and the man in the street buying gold for both traditional gift-giving and investment on the other. Chinese New Year is one such gift giving occasion, and physical withdrawals from the Shanghai Gold Exchange totalled 159t in the first three weeks of January, well above the rate of gold production. That’s 60% above the same period last year.
Of course this burst of activity is seasonal, and not only will the SGE shutdown for over a week during the New Year break, Chinese gold demand will fall into a hole for a period thereafter once gifts have been given. It is for this reason ANZ Research is warning against chasing any gold rally right now.
ANZ is also wary of the current emerging market crisis as offering support for gold. While it is difficult to know what will happen next, it is more likely emergency measures will be put in place in the countries involved, thus taking the gloss of that reason to jump into gold. Indeed, Turkey has this morning hiked its official interest rates substantially to support the lira.
The Indian rupee has also been under pressure, and indeed came under pressure all last year as the country’s current account deficit continued to grow. India previously wore the tag of world’s biggest consumer of gold, with gifts of gold expected during at least two major festivals each year. Not all the gold that flows into India stays in India, as the country is a major fabricator of gold jewellery, however measures were needed to stem the tide of rupee outflows as gold flooded in.
Two measures were rapidly adopted. The government whacked a 10% import duty on gold, and the Reserve Bank of India declared that at least 20% of all gold imports (bullion) must be exported (jewellery). The latter is known as the 80/20 rule.
India’s current account balance has since improved, and the restrictions have only served to significantly increase the smuggling of gold into India. Analysts outside India always knew the restrictions would not stand up in the long run, and it would only be a matter of time before they were abandoned. Indeed, the Indian government has now announced a review of the policy will be conducted by the end of India’s March fiscal year.
If the restrictions are scrapped, legitimate gold demand should once again return and provide support to the gold price. But expectations are for an easing, rather than a scrapping, so again ANZ warns against becoming too bullish on gold in the near term. The import duty may be lowered from 10%, but more influential would be a shift in the 80/20 rule to 90/10, for example.
The upshot is, now is probably not the time to be chasing any rally in the gold price.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
