Gold’s flow east seen for 20 years as incomes raise demand

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(June 26): The global flow of gold from west to east that helped to make China the world’s largest user will probably last for as long two decades as rising incomes spur demand, according to the China Gold Association.

China’s consumption, which increased to a record 1,176.4 metric tons in 2013, is expected to be “more or less the same” this year, Zhang Bingnan, vice-chairman and general secretary at the association, said in an interview in Singapore. China accounted for about 28 percent of global usage last year, according to the London-based World Gold Council.

Purchases in China accelerated last year after a 28 percent price slump, and the country displaced India as the biggest bullion buyer while European consumption shrank. Demand in China will rise about 25 percent in the next four years as an increasing population gets wealthier, the council said in April.

“In the next 10 to 20 years the trend probably won’t change because there is more gold in the west and less of it in the east,” said Zhang, who also addressed an industry conference in the city-state yesterday. “As incomes in the east rise, demand for gold will follow a similar trend and continue in the future whether in China or India or other developing countries, unless there’s some extraordinary event.”

Gold for immediate delivery was at $1,316.59 an ounce at 12:54 p.m. in Singapore, up 9.6 percent this year and headed for the first back-to-back quarterly increase since 2011. The decline last year was the most since 1981 as holdings in exchange-traded products fell and equities rallied.

Council’s Outlook

China’s consumption this year will probably be sustained above 1,000 tons as long as the economy expands at 7 percent, Albert Cheng, the council’s managing director for the Far East, said in February. By 2017, Chinese demand may expand to at least 1,350 tons, the council said in a report in April.

“There are less investment options in the east compared with the west, and the notion of gold as an insurance is inherent in eastern society,” said Zhang. The flow of bullion from west to east “is normal and balancing,” he said.

The Shanghai Gold Exchange plans to start international bullion trading priced and settled in yuan in the third quarter, Chairman Xu Luode told the conference, while Singapore Exchange Ltd. said that it would introduce a kilobar contract.

Global fabrication demand may increase 4.5 percent this year, underpinned by a rise in Chinese consumption, Australia’s Bureau of Resources and Energy Economics said in a quarterly report yesterday. Chinese banks and the government are trying to increase their influence on world gold markets, it said, citing the plans by the Shanghai exchange and looser import rules.

Financing Deals

As much as 1,000 tons of gold in China may be tied up in financing, the council estimated in April. China’s chief auditor discovered 94.4 billion yuan ($15.2 billion) of loans backed by falsified gold transactions, adding to signs of possible fraud in commodities financing deals, according a report on the National Audit Office’s website. The report was delivered at a National People’s Congress meeting June 24 and posted online.

Credit Suisse Group AG and Goldman Sachs Group Inc. are among banks expecting prices to extend losses into a second year as holdings in gold-backed exchange-traded funds contract to the least since 2009 and the U.S. Federal Reserve cuts stimulus.

Physical demand from China or India won’t be sufficient to offset further sales by bullion investors once the Fed’s path from tapering to tightening becomes clearer, Credit Suisse analyst Tom Kendall wrote in a June 23 report. While demand in key emerging markets is hugely important, the direction of U.S. monetary policy and real interest rates remains paramount in setting the gold price for the time being, he wrote.

Goldman’s View

Gold faces “significant downside” on the back of higher real interest rates, Goldman said in a June 23 report that detailed the bank’s asset-allocation strategy. Bullion was forecast dropping to $1,050 in 12 months, Goldman said.

“Physical gold demand remains unsupportive as Chinese buyers remain on the sidelines,” Victor Thianpiriya, an analyst at Australia & New Zealand Banking Group Ltd., wrote in a report today. Bullion will resume a decline, dropping to $1,180 an ounce at the end of the year, ANZ said.

Asia accounted for 63 percent of total consumption of gold jewelry, bars and coins last year, up from 57 percent in 2010, according to council data. Sales across the region surged after bullion tumbled into a bear market in April 2013.