How Long Can Gold Prices be Held Down?

By: Julian D. W. Phillips | Mon, Jan 20, 2014
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As we discussed in our last article, China has managed to acquire well over 2,000 tonnes of gold while the gold price has fallen from $1,650 to $1,180. This is a remarkable feat in itself.

So the next logical question is, "How long can they keep on doing this without the gold price rising rapidly?" The short answer: As long as demand in the traditional markets is either lower or the same as supply. This has two aspects, first the potential for rising demand and second, the potential for falling supplies.


Demand

London Physical Market

The main traditional market is London, where supposedly 90% of physical gold is traded. China buys there, 'on the dips' by importers taking bulk supplies and shipping them to Hong Kong (and Shanghai?) as stock for the distributors to the retail traded. This is replenished according to perceived future demand, hence the premiums that appear there. It's done in a way so as to not push prices higher. But they buy large volumes from other sources, direct.

Indian demand is routed through the London market totally, via the banks that supply India. European and U.S. physical demand accesses much of its gold there too. These buyers have been negative gold for over two years now, but particularly in the last year. Will that demand pick up?

For Europe and the U.S., we don't expect it to do so while the U.S. is selling gold from the gold Exchange Traded Funds, based there, to switch into equities. European investors expect the same scene as we see in the U.S. now in the next two years, but we do not see selling in Europe at anywhere near the levels seen in the U.S. in 2013.

Indian Demand to Return

As for India, the government has already informed us that they will be reducing import duties and easing import regulations on gold, and silver, "soon". Expect this to happen well before the elections in May this year. The potential demand from that source could be as high as 75 tonnes a month, or around 18 tonnes a week [up to 900 tonnes a year].

This will swamp the market, where demand and supply are around the same levels currently.


Can China Lower Demand to the London Market?

While this seems a fatuous question, it must be asked to understand China's position. Right now, China is still developing its access to gold suppliers both in the traditional markets and outside of these markets. It cannot hold back retail demand because of price and does not want to do that. It wants as much gold as it can access. It accepts the discipline of price, so, as a constant buyer, unless it forcefully regulates gold imports, it must allow access to all gold markets. This won't happen!

If the gold price soars to new record levels and above, in dollar and other currency terms, it will become a reserve asset itself and for those holding it. Access to people's gold will be easier than it will be in the West.

 


Supply changes will be looked at in the second part of this article

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Julian  D. W. Phillips

Author: Julian D. W. Phillips

Julian D. W. Phillips
Gold Forecaster

Julian D. W. Phillips

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price.
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