Gold Under Pressure From Lack Of Demand

Includes: GDX, GDXJ, GLD
by: Macro Investor

I had earlier written articles (here and here) about how gold demand in India has been dropping. In this article I will examine how gold demand in China, the second largest buyer of gold after India, is doing.

Gold demand for China hit a new high in the middle of 2012 as reported by the BBC:

Chinese demand for gold hit a record in the first quarter of 2012, according to the World Gold Council (WGC).

Chinese demand for jewelry and gold as an investment hit 255.2 tonnes in the period, helped by purchases during the Chinese New Year holiday.

However, by September, 2012 gold demand in China was falling as reported by Reuters:

Global gold demand dropped 11 percent in the three months to September from record levels seen in the same period last year, dampened mainly by fading Chinese fervor as its economy slowed, with stronger Indian demand stemming a larger fall, the World Gold Council said.

Chinese gold consumption fell 8 percent in the July to September period to 176.8 tonnes, the WGC's quarterly demand trends report showed on Thursday, with both jewelry and investment demand hurt by a slowing economic growth.

What is going on in China? It is essentially three things.

The first and the most obvious one is that inflation is China is tame at a mere 2%. At the same time, the Chinese Yuan is strengthening against the USD. This doesn't provide for the necessary fear that drives gold demand.

Next, the economy in China is still relatively weak. The consumer purchase for gold is tied to the economy, as people need discretionary income to buy jewelry. That has been dragging down demand for gold as the Reuters article shows.

Finally, the Chinese economy is expected to start growing robustly in 2013, but that also means the China stock market will grow fast with it. Gold in the meantime has hardly moved in 2012. This makes equities relatively attractive from an investment perspective.

China and India together consume about 45-50% of the world gold annual supply. Demand is dropping in both places as shown above, which will put downward pressure on the price of gold. To profit from this lack of demand, a few short choices are the SPDR Gold Trust ETF (NYSEARCA:GLD), the Market Vectors Gold Miners ETF (NYSEARCA:GDX), and the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ).

Disclaimer: This is not meant as investment advice. I do not have a crystal ball. I only have opinions, free at that. Before investing in any of the above-mentioned securities, investors should do their own research, consult their financial advisors, and make their own choice.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.