Federal Reserve Stand Favors Gold Bulls
Unlike in 2013, where Gold bearish views got boosted at every point, 2014 seems to favor the gold bulls right from the start to the new year. The outlook for less monetary stimulus had helped drive gold prices down 28% last year, the most in more than three decades. Prices rebounded in 2014 as signs of faltering economic growth in the U.S. and tensions between Russia and Ukraine revived demand for the metal as a haven.
Speculators misjudged prices in three of the past four weeks. First, investors anticipated accelerating inflation only to see the Fed signal higher borrowing costs in 2015. Then, bets that the gold rally would fizzle were undermined by weak economic reports. Bearish speculators misjudged gold bets again as the release of Federal Reserve’s FOMC minutes extended this month’s rally in bullion. Money managers cut their net-long positions to the lowest since February in the week ended April 8. The net-long position in gold dropped 7.4% to 98,492 futures and options in the week to April 8, a seven-week low and the third consecutive decline, but short holdings betting on a drop rose 6.5% to the highest in five weeks. The minutes of the Fed’s March FOMC meeting the next day played down forecasts for higher rates, and gold had its biggest weekly gain in a month. The Fed signaled March 19 that borrowing costs might climb as soon as 2015. Yet major banks including Morgan Stanley and Goldman Sachs Group Inc. aren’t convinced gold’s rally will last, reported Bloomberg.
Surprisingly in contrast, wagers on rising oil prices increased 10% to 331,056 contracts, as prices advanced 2.6% last week. The International Energy Agency said in a report on April 11 that OPEC will need to pump more crude this year.
China Gold Demand To Rise Further 25% by 2017
China’s consumer gold demand increased 32% to 1,065.8 tons last year. Gold demand in China, which overtook India as the largest user last year, will rise about 25% in the next four years as an increasing population gets wealthier, according to the World Gold Council. China’s jewelry purchases of almost 669 tons accounted for 30% of the global total and will reach 780 tons by 2017. Annual bar and coin demand could near 500 tons by 2017, 25% above last year’s record.
Consumer demand will expand to at least 1,350 metric tons by 2017, the London-based council said in a report today. Growth may be limited this year after 2013’s price decline spurred consumers to do more buying last year, it said. China accounted for about 28 percent of global usage last year, the council estimated in February.
Buying accelerated last year as prices slumped 28%, the most since 1981, and the nation became the top buyer in place of India, where import restrictions curbed demand. China’s economy will expand 7.4 percent this year, economists surveyed by Bloomberg estimate. While that’s set to be the least since 1990, it’s still more than double expected growth in the U.S.
Albert Cheng, Far East managing director at the council, said in a statement accompanying the report that, “Whilst China faces important challenges as it seeks to sustain economic growth and liberalize its financial system, growth in personal incomes and the public’s pool of savings should support a medium-term increase in the demand for gold, in both jewelry and investment.” He also added that, “We have witnessed astonishing increases in demand for gold from consumers across the country. The cultural affinity for gold runs deep in China and when this is combined with an increasingly affluent population and a supportive government, there is significant room for the market to grow even further.”
China’s Gold Market: Progress and Prospects – WGC
- World Gold CouncilThe World Gold Council recently released a major report, China’s gold market: progress and prospects, examining the factors that have driven China’s rise to become the number one producer and consumer of gold since the market began liberalizing in the late 1990s. It also highlights why, despite this steep growth in demand, the market will continue to expand, irrespective of short term blips in the economy.
The next six years are expected to see China’s middle class grow by over 60%, or 200m people, to a total of 500 million. Comparing this to the total population of the US, which stands at 319m, puts the size of this new market of affluent consumers, with the propensity to buy gold, in perspective.
In addition to these newly emerging middle classes, rising real incomes, a deepening pool of private savings and rapid urbanization across China suggest that the outlook for gold jewelry and investment demand in the next four years will remain strong.
Key facts:
- China’s continuing urbanization means that it now has 170 cities with more than one million inhabitants - within these cities, the middle classes currently number 300 million and are set to grow to 500 million by 2020. Demand for gold amongst those with a greater disposable income and limited investment opportunities will continue to grow.
- Chinese savings levels remain high – there is an estimated US$7.5 trillion in Chinese bank accounts and household allocations to gold remain small, around $300bn. Gold is seen as a stable, accessible investment by consumers, particularly in the light of rising house prices and a lack of alternative savings options. Chinese investors have a preference for physical gold over paper, with investment focused on small bars, gift bars or Gold Accumulation Plans (GAPs). New gold investment products mean that medium term demand for bars and coins could reach close to 500t by 2017 – a rise of nearly 25% above its record level last year.
- China has become the world’s number one jewellery market, nearly trebling in size over the past decade – at 669t in 2013, it accounts for 30% of global jewellery demand. Estimates suggest that demand will continue to grow and reach 780t by 2017. There are now over 100,000 retail outlets selling 24k gold and thousands of manufacturers nationwide.
- Consumer sentiment toward gold is unwavering – although 40% of jewellery
consumption relates to weddings, the appetite for gold in China goes beyond occasions and gift giving. 80% of consumers surveyed for this report planned to maintain or increase their spending on 24-carat gold jewellery over the next 12 months believing that gold will hold its long-term value and because they expect to have a higher level of disposable income. - Chinese electronics demand for gold will see small gains in the next four years – industrial demand has grown with electronics being the key driver (climbing from 16t in 2003 to 66t in 2013. China is also the leading market for gold related patents such as the use of nanogold in healthcare.
- Official gold holdings in China totaled 1,054t at the end of 2013 making the country the world’s sixth largest holder of bullion- based on this declared stock, gold represents 1% of China’s total official reserves (down from a peak of almost 2% in 2012) due to the rapid growth of the country’s foreign exchange holdings which reached around US$3.8 trillion at the end of 2013. Speculation continues as to whether the Chinese government has increased its gold holdings.
- China has gone from being a minor producer to the world’s largest source of mined gold - in the past ten years production has doubled from 217t to 437t.
World Gold Council
The World Gold Council is the market development organisation for the gold industry. Working within the investment, jewellery and technology sectors, as well as engaging in government affairs, our purpose is to provide industry leadership, whilst stimulating and sustaining demand for gold.
We develop gold-backed solutions, services and markets, based on true market insight. As a result, we create structural shifts in demand for gold across key market sectors.
We provide insights into the international gold markets, helping people to better understand the wealth preservation qualities of gold and its role in meeting the social and environmental needs of society.
Based in the UK, with operations in India, the Far East, Europe and the US, the World Gold Council is an association whose members include the world’s leading and most forward thinking gold mining companies.