LAUNCESTON, Australia – The spot price of gold has reached a six-month high, driven by optimism that monetary tightening in western countries is nearing its end. However, the rally may face challenges due to the influence of China and India, which together make up over 50% of the physical gold market.
The soaring prices of gold in both China and India, coupled with signs of weakening retail demand, are key factors that may impede the precious metal’s upward trajectory.
Spot gold surged to $2,017.82 an ounce on Monday, marking an 11.5% increase since its recent low on Oct. 6. In India, the price of gold reached 168,145 rupees per ounce, nearing its all-time high of 169,401 rupees set on May 4. The metal has gained 11.8% in rupee terms since its October low.
India’s gold demand has remained solid thus far in 2023 due to a strong domestic economy. However, market momentum appears to be waning, potentially impacting future demand.
China presents a similar pattern, with premiums over spot prices declining from $43 to $58 an ounce to $20 to $40 an ounce in recent weeks. Additionally, China’s imports from Hong Kong have fallen for the second consecutive month, indicating subdued demand. Data from the Hong Kong Census and Statistics Department reveals a 23% decrease in net imports from Hong Kong in October compared to September.
Spot gold in China’s currency also climbed to 14,433 yuan per ounce, nearing its record high of 14,701 yuan set on Oct. 27. This represents a 15.7% increase since mid-February.
These high prices have the potential to dampen demand from Chinese consumers, as evidenced by reduced imports from Hong Kong and declining premiums. The same holds true for India, where recent price rallies are likely to curb demand growth in the current quarter.
While gold typically experiences sustained rallies when investment buying, central bank buying, and jewelry and bar/coin purchases align, signs of reduced demand in China and India counteract these positive drivers.
Despite the potential challenges, this does not imply that gold cannot continue to climb. The recent conclusion of monetary tightening in Western economies remains a positive driving force. However, uncertainties surrounding consumer willingness to purchase gold amid high prices raises questions about the metal’s prospects.
In summary, the current surge in gold prices is influenced not only by the conclusion of monetary tightening in Western countries but also by demand dynamics in China and India. These two Asian heavyweights, constituting over 50% of the physical gold market, play a significant role in shaping the trajectory of gold prices. Reduced retail demand in both countries may pose challenges to the sustainability of the metal’s rally.
Disclaimer: The opinions expressed in this article are solely those of the author, a columnist for Reuters.
