Gold Stays Low Despite China Buying

29-Sep (Wall Street Journal) — China’s stock-market turmoil this summer has prompted a rush of gold buying by the world’s No.1 consumer of the shiny metal, but prices are still hovering near five-year lows because investors worry the commodity, denominated in dollars, will become more expensive when the U.S. Federal Reserve raises rates.

Withdrawals of gold from the Shanghai Gold Exchange—a barometer of Chinese investment and retail demand—have reached 1,891.9 tons so far this year, 560.9 tons more than during the same period last year and 281 tons more than the comparative period in 2013.

Chinese consumers, seeking a safe haven as stocks tanked, have ramped up gold buying earlier than normal.

Typically, most Chinese gold buying takes place between the Golden Week holidays in October and Chinese New Year in February, because of festival buying and gifting of jewelry.

This time, however, China imported a net 53.9 tons of gold from Hong Kong in August, more than double the imported quantity in the same month last year, according to a Commerzbank report.

“This strong rebound surprises us. Normally the summer-season demand is slow,” says Helen Lau, analyst with Hong Kong-based Argonaut Securities. “But investors are liquidating their stock positions and investing in gold.”

…“We have seen a devaluation in the Chinese currency, which has likely contributed to increased demand in China. We are also probably reaching the point where seasonal buying is returning in the Chinese market,” says Ryan Case, Hong Kong-based head of institutional sales at Bullion Capital, a gold exchange.

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PG View: Investors believe gold will “become more expensive when the U.S. Federal Reserve raises rates”? Really? Because I thought everyone was expecting gold to fall in value when the Fed raises rates because the opportunity cost of owning gold . . . blah blah blah . . . gold doesn’t pay any yield . . . blah blah blah.

Apparently analysts are now thinking we need to put that first rate hike behind us “will remove the uncertainty on gold’s outlook.” What’s interesting is that gold did actually rise quite substantially (82%!) during the last Fed tightening cycle. Not that anyone is expecting a “tightening cycle” per se, in fact once the Fed pulls the trigger they may be one-and-done.

Nonetheless, the more salient part of this article has to do with ongoing robust Chinese demand. See yesterday’s DMR for some further enlightenment on both the demand piece and perhaps more importantly on where the supply is coming from.