Robust Demand For Physical Gold Support Prices

Gold prices climbed to their highest level since September 10 last week, breaking above the $1,250 an ounce level.

Gold's outlook this week will depend largely on the Federal Reserve policy meeting, when the U.S. central bank is widely expected to end its bond-buying stimulus. The Fed's two-day meeting, which begins today will also be watched for clues on whether any slowdown in Europe or elsewhere could affect the central bank's monetary policy.

On Monday, October 27, some of the biggest financial news of the year made huge waves all over Asia. Yet in the Western press, this hugely important event was barely even been mentioned.

The Chinese government announced that the Renminbi or Yuan will become directly convertible with the Singapore dollar effective Tuesday, marking another step toward internationalizing the Chinese currency.

The announcement by China Foreign Exchange Trading System (CFETS) extended the yuan's list of direct onshore trade to more major currencies, including the U.S. dollar, the euro, British sterling, Japanese yen, Australian dollar, New Zealand dollar, Malaysian ringgit and Russian rouble.

With direct trading of their currencies, China and Singapore will be less dependent on the U.S. dollar to settle bilateral trade and investment deals.

Previously, the exchange rate between the two currencies was calculated based on the yuan-U.S. dollar central parity rate and the Singapore dollar-U.S. dollar rate.

Now that the two currencies can be directly traded, the yuan-Singapore dollar rate will be set based on the average prices offered by market makers before the opening of the interbank foreign exchange market.

The Chinese government is gradually relaxing its hold over the yuan and making it a global reserve currency.

China is also under pressure to diversify its foreign exchange reserves, which stood at 3.89 trillion U.S. dollars at the end of June.

According to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), international bank payments denominated in yuan have nearly tripled in value in the past two years.

Physical buying ahead of the Indian Diwali holiday helped push gold to its upper levels, along with some short-term technical-chart related buying, but gold’s inability to build on those gains caused the market to retreat.

Gold imports into India surged more than four-fold last month on expectations that declining prices would boost festival demand.

Purchases have been estimated at about 95 metric tons compared with 15 tons to 20 tons in September last year, said Bachhraj Bamalwa, a director at the All India Gems & Jewellery Trade Federation.

Buying and gifting of gold is considered auspicious and the most favorable time is the festival of Dhanteras, two days before Diwali which occurs on Oct. 23. Festivals run through November and the wedding season follows to early May.

Sales of gold increased by around 20% this Dhanteras when compared with last year. In Ahmedabad, as many as 60 jewellers that belong to the Ahmedabad Jewellers' Association launched the grand shopping festival "Swarna Utsav" with the primary objective of recouping the losses incurred by them in the past six months due to lack of business. In Ahmedabad the local jewellers expected the business to cross Rs 250-300 crore till Diwali (October 23).

"During Dhanteras the sales of gold and silver has been significantly higher than last year. We expect sales to rise by 15-20% this year over last season," said Shantibhai Patel of the Ahmedabad Jewellers' Association. He said that this was due to lower price of the precious metals.

"We expect sales of Rs 250-300 crore this Diwali season," he added. Explaining the buying trend Patel said that people seemed to prefer coins, bars and lightweight jewellery this year for investment. "Compared to last year more people are going for gold coins and lightweight jewellery. This is also because the marriage season is a little late this year," he said.

In Rajkot people crowded local jewellery stores. The Rajkot Gold Dealers' Association president Bhayabhai Sholiya said that in Rajkot city dealers expected to see an increase in sales of around 15%-20% compared to the previous Diwali season.

Haresh Soni of the All India Gem and Jewellery Trade Federation also expects to see higher sales this season. Meanwhile, jewellery sales jumped by at least 30% this Dhanteras in the popular Zaveri Bazaar.

According to MMTC-PAMP-the country’s leading gold and silver refining and minting facility, its entire inventory of gold and silver coins minted for sale during Diwali has been sold out. The total sales of gold and silver coins increased by 40% over last year. 

MMTC-PAMP is a joint venture between state-owned Metals and Minerals Trading Corporation of India (MMTC) and Switzerland-based world’s leading bullion brand PAMP SA. It is the country’s first and only LMBA accredited gold and silver refinery.

"Diwali sales across the country were very good. It was about 20% higher compared with last year," Bachhraj Bamalwa, director at the All India Gems and Jewellery Trade Federation, told Reuters. The trade body represents more than 300,000 jewellers.

Diwali, known as the festival of lights, is a five-day celebration with fireworks, candles, sparklers, and other lighting displays by millions of Hindus, Sikhs and Jains across the world. The first day this year is October 23, and it usually falls between the last two weeks of October and the first two of November.

During the five-day festival, people dress in their best new clothes, and of course, gold jewellery. Nearly 20% of annual jewellery sales are attributed to the holiday.

"This year prices were low, sentiment was good and we have a stable government at the centre; all of these helped boost sales," Bamalwa said, referring to this year's election of Narendra Modi as the prime minister.

Although the major gold buying festivals of the year are over, the wedding season is set to begin in the third week of November. Bamalwa said sales could continue to be strong due to the wedding season that will extend until early next year.

"The gold demand this Diwali mirrors the general optimism that has set in the economy, reinforcing the traditional faith in gold for the average household saver and the increased economic relevance of this asset class due to various uncertainties on the horizon. Policy restrictions have had little impact on demand for gold, though sources of supply have increasingly shifted to unauthorised channels. It is time for a long term approach to gold in India. As a nation we need to focus on measures that will unlock the potentially transformative value of the gold stored in millions of private households in order to fund the nation's growth." Somasundaram PR, Managing Director, India, World Gold Council.

The World Gold Council forecasts India will import 850 to 950 tons of gold in 2014.

According to the China Gold Association, China's gold off-take in 2013 reached 2,200 tons, substantially more than the 1066 reported by the World Gold Council. According to GATA consultant Koos Jansen, the amount would constitute most of world gold mine production and the figure apparently does not include purchases by the People's Bank of China, which remain the most sensitive state secret. And, on Monday October 27, China's net gold imports from main conduit Hong Kong jumped to a six-month high in September. 

Net imports from Hong Kong to the mainland rose to 68.641 tons last month from 27.477 tons in August, according to data e-mailed to Reuters by the Hong Kong Census and Statistics Department. 

Total gold imports from Hong Kong totalled 91.745 tons. 

Meanwhile, The Central Bank of the Russian Federation added a whopping 1.2 million troy ounces to their holdings in September.  This is the biggest one-month purchase they've ever made. The previous biggest addition was 1.1 million ounces back in May of 2010.

Russia's Central bank reserves now stand at 37.0 million troy ounces.

No asset has had as much history of purchasing power as gold. Fiat currencies are unreliable – they aren't tied to any asset of value. Their worth comes from government regulations and laws, which are subject to crumble over time.

Physical gold coins or bars are an unequalled safe haven, due to their liquidity and lack of counterparty risk. (This does not include limited edition medallions and numismatic items which are not to be confused with bullion products). Frankly, I believe limited edition medallions are not of any value to investors.

Both gold and silver are a liquid, universally recognized form of transportable wealth that is not simultaneously someone else's liability. That's what makes them so desirable.

TECHNICAL ANALYSIS

Although gold prices pierced the $1250/oz. level, they failed to rally further. Prices may correct before the next leg to the upside.