Crucial physical gold demand from China absent – ANZ

Otmane El Rhazi from The Bullion Desk.

Physical demand from Chinese buyers appears to have dried up, ANZ Research has said, despite the fact that prices are at their lowest since April 2010.

With spot gold last at $1,145.50/1,146.20 per ounce, its lowest since April 2010 and down significantly from its 2014 peak of $1,388, many had expected China, the world’s largest consumer of gold last year, to return to the market in force to pick up metal at bargain prices.

The catalyst for the move lower was the Bank of Japan’s surprise decision last week to expand the annual monetary base by 80 trillion yen and the end of quantitative easing in the US.

“The Bank of Japan decision was the final nail that pushed gold below the crucial $1,180 per ounce support level,” ANZ said in a report. “Though in truth, gold was already on the back foot. The dollar continued to make new highs and physical demand visibly tapered off by the end of the month.”

But the Chinese market remains moribund. Spot premiums on the Shanghai Gold Exchange have dropped to flat or even to a discount on 1kg bars in recent days from $6 per ounce in October, sources said.

“What is clear is that the Chinese gold consumer is well and truly on the sidelines for the moment. We saw a pickup in physical demand in September, which continued through most of October,” ANZ added. “However, this seems to have dried up once more despite the continued decline in price.”

“The Shanghai Gold Exchange premium to London traded flat to negative in recent days, which to us is a clear negative price signal,” it added

The Chinese government’s investigation into precious metal shipments to Hong Kong could be one reason for the dearth of activity, although it is unclear how much gold is involved.

Instead, local buyers have been reluctant to buy gold even at these levels in anticipation of further falls in the price, other sources suggested. And the nearest holiday-related buying period is the Chinese New Year, which does not fall until mid-February.

The lack of demand and strengthening dollar has made the near-term outlook on the metal bleak. With support at $1,180 and $1,155 having been taken out, the price is now susceptible to testing $1,100 in the coming sessions in the absence of fresh upward drivers.

“The bears seem to be well and truly in charge. Near term, it is hard to argue otherwise,” ANZ added.

(Editing by Mark Shaw)

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