Precious metals were pressured early last week (1/7/13-1/11/13) on continuing fallout from the release of Fed meeting minutes; the week before that, traders thought it might lead to the central bank tightening policy sooner than expected. However, lower prices once again spurred buying in Asia, where gold trading in Shanghai rose to record levels in advance of the Chinese New Year and a weakening yen led to record high gold prices in Japan, while, in the U.S., gold and silver coin sales surged.
Late in the week, better-than-expected trade figures from China spurred hopes of stronger demand for raw materials, leading to a precious metals advance. This persisted until higher-than-expected inflation in China was reported on Friday, prompting buyers to turn into sellers on fears that rising prices may limit the government's ability to provide more stimulus for the world's second-largest economy that now appears to be rebounding.
But, without a doubt, the most important gold-related news to emerge from China last week was of surging gold imports. As has been the case over the last year, demand from China is likely to play a key role in supporting metal prices and, eventually, pushing prices up and out of their recent trading range.
For the week, the gold price rose 0.4 percent, from $1,656.80 an ounce to $1,662.70, and silver rose 0.9 percent, from $30.18 an ounce to $30.44. Gold is now down 0.7 percent in 2013, still 13.5 percent below its 2011 high, and silver is up 0.3 percent this year, down 38.5 percent from its high almost two years ago.
Sentiment amongst futures traders (who, importantly, determine market prices) remains poor after gold concluded its largest quarterly decline since 2008, failing to respond positively to the announcement of new quantitative easing measures from the Federal Reserve last month. It appears as though precious metals markets are in need of some sort of catalyst and, as was the case last year, surging gold demand in China could be just what these markets need.
As shown below, gold imports from Hong Kong to China rose from 47.5 tonnes in October to 90.8 tonnes in November, the second highest total of the year.
Recall that after the announcement exactly a year ago that November 2011 gold imports had reached a similar level, the gold price surged in January, ending the month with a gain of nearly 14 percent. Net gold imports from Hong Kong to China totaled 463 tonnes through the first 11 months of the year, already higher than last year's record high of 380 tonnes.
China is the world's top gold producer, and expected to see output of nearly 400 tonnes in 2012, and gold exports are prohibited, so a highly anticipated statistic to be released by the World Gold Council early this year is exactly how high gold demand in China rose last year and whether they'll top demand in India.
Of course, some portion of domestic gold production and/or imports are surely being purchased by the People's Bank of China, which has been rather tight-lipped about buying over the years.
When they last told the world how much gold they had in their vaults in mid-2009, the total had increased by about 400 tonnes to over 1,000 tonnes, and this helped propel prices sharply higher at the time. Given their clearly stated desire to buy more of the yellow metal, they've probably added at least 400 tonnes in recent years - perhaps much more - however, there's no telling when they'll let the rest of the world know exactly how much.
In India, gold imports surged in the wake of the government announcement that duties may be raised from 4 percent to 6 percent as soon as next month. Dealers reportedly bought 30 tonnes of gold last week alone, rather than a more typical 5 or 6 tonnes at this time of the year, and they are expected to again go on strike to protest higher taxes that are aimed at reducing India's trade deficit. Smuggling is also on the rise, more than tripling from 2011 to 2012.
For a good discussion of India's gold demand problems, the article Curbing gold demand as panacea for economic ills not a good sign is worth a look. It begins:
One of the reasons why foreign exchange is diverted to illegal channels is the illegal import of gold. It is time we took a bold step to recognise the realities of the situation and legalise the import of gold." Finance minister Manmohan Singh, February 1992.
Fast forward two decades…
Demand for gold must be moderated… We may be left with no choice but to make it more expensive to import gold. The matter is under government consideration." Finance minister Palaniappan Chidambaram, January 2013.
Inflation fears in Japan (a phrase that's been an oxymoron for decades) is expected to spur gold buying there, as the new government approved a $117 billion stimulus program last week. Pension funds plan to more than double their investment in gold to more than $1 billion over the next two years (about 20 tonnes of the metal) and, while this isn't much for the world's second-largest pool of retirement money outside of the U.S., it could increase sharply from there.
Interestingly, at just 3.3 percent, the Bank of Japan has one of the smallest reserve allocations to gold in the world, and the Japanese people have never been known to invest large amounts of money in the metal, but if the new government is successful in generating higher inflation, that could change in a big way.
Here in the U.S., the mint reported the highest one-day sales on record when they began accepting orders for 2013-dated American Silver Eagle bullion coins. Recall that the mint ran out of 2012-dated silver eagles in mid-December and, while much of what happened last week was pent up demand, it is strong demand nonetheless.
Opening day sales for gold eagle coins were also quite strong, up 33 percent versus a year ago.
Those investors favoring ETFs over the physical metal weren't deterred by recent price weakness as the $10 billion (up from just $9.1 billion a week ago) iShares Silver Trust ETF (SLV) added an impressive 72 tonnes last week, a feat that was offset by the $71 billion SPDR Gold Shares ETF (GLD) shedding four tonnes of gold.
There were a bevy of revised price forecasts for gold and silver this year released by investment banks (most, if not all, of the revisions being downward) and, since I collected many of the 2013 predictions that were made late last year, I intend to compile and publish a before-and-after table sometime in the days ahead.
Sentiment remains poor, but more news like what came from China last week about surging gold imports could help to improve that significantly.