China’s Gold Appetite Gets Bigger

India is to be officially dethroned as the world's biggest purchaser of the "yellow metal" by year-end. Many are forecasting that gold purchases in China will surge to +29% for this year. Physical demand has found some much needed support after Hong Kong reported that China has net imported from the 'Special Administrative Region' 131.19 tonnes of gold last month, the second highest level in history.

China remains consistent in its appetite, the country has imported more than 100 tonnes of gold each month in the last six-months. The precious metal is heading for its first annual drop in 13-years as the majority of the market lose faith in the metal as a store of value, fueled by concern that expected reductions in $85b of monthly bond buying by the Fed will ease the risk of accelerating inflation.

For some, Chinese demand is too little too late. John Paulson, the best-known gold bull since he started wagering on bullion more than three years ago, is backing away from his bet. Earlier this week Paulson announced that he would not be adding to his gold fund because it’s not clear when inflation will accelerate. To date the fund has lost -63%.

The market expects that Chinese gold demand will continue to pick up before the lunar New Year at the end of January 2014. The gold appeal is due to the lack of alternative investment opportunities within the country. With equities under pressure, and Chinese authorities dissuading real estate investment, gold remains a solid alternative.

However, spot gold prices continue to be dictated by US economic data and monetary policy. Gold short positions have been rather aggressive in the past few weeks. The weaker of those positions have been reluctantly squeezed out over the past two trading sessions as price again approaches the old support level $1,250. The market continues to prefer selling rallies ahead of the psychological $1,300 mark. The next key event will be the November non-farm payroll next Friday. The market continues to look for solid clues on what to expect on policy direction at next months FOMC meet on December 17-18th.

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