HardAssetsInvestor

Written by Sumit Roy  |

May 08, 2012

Precious Metals Monitor: China’s Surging Demand For Gold Reduces Its Safe-Haven Status, Prices To Test $1533

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We offer our latest analysis on the precious metals market.

The latest data from the Hong Kong Census and Statistics Department showed that China’s demand for gold continued at a furious pace in March. Imports into the mainland from Hong Kong (the only readily available data on the country’s imports and a proxy for total imports) totaled 62.91 metric tons in the month, up 59 percent from February and almost sevenfold from the same month a year ago.

For the first quarter as a whole, imports were also up close to sevenfold year-over-year. Certainly, China’s demand for gold is as strong as it’s ever been.

In fact, speculation is mounting that the country may surpass India as the world’s largest gold consumer this year. Of course, that remains to be seen, especially after the Indian government removed a controversial excise tax on sales of gold jewelry earlier this week.

The removal of the tax — which was seen as depressing sales in the No. 1 gold consumer — may reinvigorate demand in India.

One might think that these two pieces of bullish news from China and India would give a boost to gold, which up until now had been stuck in a lackluster trading range. But in typical (counterintuitive) market fashion, prices actually tumbled.

The primary catalyst for the drop is fairly straightforward: Risk assets across the financial markets have been facing selling pressure in recent sessions amid economic concerns in the U.S. and sovereign debt concerns in Europe.

Since September of last year, gold and the rest of the precious metals complex have exhibited a strong correlation with other risk assets, such as stocks and commodities; thus, this latest correction is not surprising in that context.

In fact, the latest news from China may actually be exacerbating the selling. The gold market is becoming increasingly reliant on buying from the Asian giant, which in turn depends on China’s economic growth.

This characteristic is at odds with another role gold sometimes plays —that of safe haven. Indeed, safe-haven demand for gold has been noticeably missing for several months. Periodic bouts of eurozone sovereign debt worries — the situation surrounding this past weekend’s elections being the latest example — have failed to provide support for the metal.

Perhaps gold will regain its safe-haven status again, but in the short term, it will likely move in lock step with other risk assets. From a technical perspective, prices look poised to eventually test key support near $1533.