Demand for gold collapsed in the second quarter as Chinese buyers moved into stocks


Gold just can’t take a trick. Nothing seems to keep the price up. Firstly, the near exit of Greece from the Euro didn’t lift prices and then the Shanghai market crash failed to lift it materially from its US dollar price doldrums.

It’s a significant divergence from gold’s usual place as a safe haven in times of trouble. And because it couldn’t hold even the most feeble of rallies, sentiment was undermined and gold is trading today at $1,096. That’s around the lowest levels since 2010. It’s also roughly a 50% retracement from the 2001-11 rally.

Part of what’s driving it lower is a loss of confidence by traders who, having seen gold only reacting to negative stimuli, stepped away from the market and pulled bids. The latest leg down was a result of news that that the Chinese government had increased its official gold holdings by 604 tonnes to 53.3 million ounces.

That should have been good news, but the announcement shocked many traders who thought China was on a higher path of accumulation. China’s 53.3 million ounces represents 1.6% of China’s total reserve holdings, but that’s a tiny fraction of the global average of around 10%.

So they are not buying as much as the market was hoping.

But that’s not the only disappointment according to Thomson Reuters and the GFMS Gold Survey for Q2 2015.

The survey found that:

Q2 2015 physical gold demand was at its weakest since 2009, down 14% year-on-year as few markets reported increases and Chinese buyers stayed away from gold.

On top of that “almost all major physical gold markets suffered in the second quarter as retail investment (demand for bars and coins) fell another 12% year-on-year and is now some 63% below the Q2 2013 peak.”

Even jewellery production fell 6% year-on-year with consumption down 9%. Then add “a 7.5% fall in average US dollar gold prices.”

Gold has really lost it lustre it seems.

A lot of it seems to be Chinese buyers leaving gold for Shanghai stocks. The report said:

Stock market growth was the story of the first five months in China and this saw substantially lower gold purchases. The retreat in June and July did not help gold purchasing either, as some investors were locked in and others were nervous about asset allocation. At 35 tonnes Chinese retail investment (bar and coin purchasing) fell by 26% year-on-year, its weakest second quarter since 2009. Jewellery purchases, often 24-carat investment material, also saw a fall in offtake to 102 tonnes during the second quarter, a 23% year-on-year decline.

Those are staggering falls.

Earlier this week the NAB’s co-head of global currency strategy Ray Attril reported that CFTC data released on Friday showed that the subset of hedge fund traders is “holding net shorts for the first time since the data started being recorded in 2006 (-11,345 contracts)”.

That tells you how bearish the market is getting.

The question now for the bulls and the bears is whether all the bad news is baked into the cake leaving room for buyers to return. Or, rather if sentiment has been damaged irreparably.

The jury is still out.

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