Speculation "Driving Gold" Near 4-Week Lows As Chinese Market Gets "Massive Vote Of Confidence"

WHOLESALE DEALING in gold was muted Monday morning in London, with prices bouncing off their lowest level in almost 4 weeks at $1280 per ounce as European stock markets rose.

Major government bonds ticked higher after Friday's sharp sell-off on strong US jobs data.

Silver prices also fell to their lowest level since Oct. 17th, turning higher from $21.26.

The Sterling price of gold dipped below £800 per ounce – a level first reached in May 2010 – for the third time since April.

Wholesale trading in India and Dubai was also "subdued" overnight according to gold dealers, after world prices ended last week 2.5% down.

Volumes on the Shanghai Gold Exchange in China, in contrast, were the strongest in 3 weeks.

The Shanghai price, which slipped at the start of this month below the world's benchmark of London settlement for the first time in 2013, rose to a premium today of nearly $5 per ounce. 

Secure logistics firm Malca Amit meantime said Monday that it's opened a 2,000-tonne storage facility inside Shanghai's freeport zone.

"Such a facility is a massive vote of confidence for the Chinese gold market," says Philip Klapwijk, formerly of Thomson Reuters GFMS and now CEO of Precious Metals Insights in Hong Kong.

"The trend for demand has been very strongly positive," Bloomberg quotes Klapwijk, who said last week that alongside a surge in consumer gold purchases,China's central bank gold buying likely totaled 300 tonnes in the first 6 months of 2013 alone.

"It is very likely," agrees the weekly report from refining giant Heraeus, "that China will overtake India as the largest [private] gold consumer for the first time.

"[But] demand has eased off a bit and a sustainable trend is not expected at these levels."

Back in the traditional dealing centres of India and the Middle East short term, "Physical markets might come better into play should gold prices soften any further," reckons Gerhard Schubert, head of commodities at Emirates NBD in Dubai.

"But it would be doubtful if the physical markets could stem the flow of derivative sales, should this pattern occur."

Latest data from US regulator the CFTC show speculative traders, as a group, raising their bearish bets and cutting their bullish positions in gold futures and options in the week-ending last Tuesday.

Overall, the so-called "net spec long" position – which measures the balance of bullish over bearish bets held by non-industry players – shrank 12% to the equivalent of 372 tonnes.

That compares to a 5-year average of 675 tonnes.

"These numbers are a little stale," says ANZ Bank in a note, "given this snapshot was taken prior to [Thursday's] stronger-than-expected US GDP and [Friday's] non-farm payrolls figures.

"But they indicate that levels above $1340/oz were seen as good levels [by speculators] to lighten longs and initiate further shorts."

"Money managers," agrees the commodities team at Commerzbank, "made something of a retreat from the gold market again, having noticeably expanded their net long positions in the two preceding weeks.

"In other words, the fall in price [ahead of the US data] was largely speculatively-driven, just as the price increase was beforehand."

India's trade deficit – widely blamed on the country's historic and cultural gold demand – meantime rose last month from September, but was almost half the level of October 2012 as gold and silver imports fell by four-fifths year-on-year to the equivalent of $1.3 billion.

Despite the looming Hindu wedding season, "Supplies are limited" by the government's anti-import rules, says Daman Prakash Rathod at wholesalers MNC Bullion in Chennai.

"Only a few jewellers are buying at the current price."

India's leading body for the gold industry, the Bombay Bullion Association, said at the weekend that it plans to enter the market as a participant, launching an exchange-traded product and minting small investment units.

Adrian Ash

(c) BullionVault 2013

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