China Is Losing Its Taste for Gold

16-Apr-2014 Intellasia | The Wall Street Journal | 6:00 AM Print This Post

China’s appetite for gold is waning after a decadelong buying spree, suppressed by the country’s economic slowdown and constrained credit markets.

Demand in the world’s biggest gold consumer is likely to stay flat in 2014, according to estimates from the World Gold Council. Gold demand in China has expanded every year since 2002, when it declined, according to the industry group, whose forecasts are closely watched in the gold market.

Decelerating Chinese gold demand could threaten the recent recovery in gold prices, some investors and analysts say. Gold futures are up 10 percent year to date, after falling 28 percent last year, the biggest annual drop since 1981. Unrest in Ukraine, a bumpy start to the year for stocks, and the Federal Reserve’s commitment to low interest rates in the long term have propelled gold higher. Investors typically seek the metal as a haven in times of turmoil and a store of value during periods of low rates.

On Monday, front-month gold for April delivery rose $8.50, or 0.6 percent, to $1,327.20 a troy ounce on the Comex division of the New York Mercantile Exchange.

Chinese consumption has helped to underpin gold prices since 2001, when many price and trading restrictions were relaxed. Last year saw frenzied buying as Chinese investors and jewellery buyers sought to capitalise on low prices. Chinese demand jumped 32 percent in 2013, vaulting the country past India to first place in the rankings of the world’s gold consumers. But it is unlikely that record pace can be maintained, even if prices turn lower, according to the World Gold Council.

“We’re looking at best for it to be on par with 2013,” said Albert Cheng, managing director for the Far East at the World Gold Council. The council is releasing its latest report on China’s gold market Tuesday.

Although the report doesn’t offer a figure for estimated Chinese gold demand this year, it says 2014 will be a year of consolidation. “Chinese consumers brought forward jewellery and bar purchases, which may limit growth in demand in 2014,” the report said. Cheng pegs China’s private-sector gold consumption, a category that includes jewellery, bullion and industrial demand, to remain roughly at 2013′s level of 1,187 metric tonnes.

“The situation in China is certainly a headwind,” said Vedant Mimani, lead portfolio manager with the $80 million Atyant Capital Global Opportunities Fund, which is based in Miami. “This demand that’s been there for 11 years has become questionable.”

The fund holds bets on falling gold prices. Mimani said he expects gold to drop below $1,200 in the next six months amid tight credit conditions in China.

In recent months, Beijing has focused on reining in China’s system of unofficial lending and shoring up banks against a property sector that many analysts believe is overheated. As a result, more cash is being tied up in uses other than for gold.

In the longer term, the World Gold Council estimates that China’s appetite will rev up again. Chinese gold demand, excluding factory stockpiles, will increase 19 percent by 2017 to 1,350 metric tonnes, from 1,132 tonnes in 2013, according to the report. As China’s economy continues to expand and citizens become more affluent, more of them will purchase gold jewellery or bullion for the first time, Cheng said.

While gold’s recent climb has been driven mainly by Western investors, demand from China also could pick up if property values there drop sharply or if the financial system shows more signs of stress, said Joe Foster, portfolio manager of Van Eck International Investors Gold Fund, with $719 million under management. “Chinese citizens have a limited range of investment options…and they have a cultural affinity toward gold,” he said.

There was little activity visible on Monday at Chenghuang Jewellery, a store located just outside Yuyuan Gardens, a popular tourist attraction in Shanghai that is home to throngs of jewellery merchants. Sales associates stood around chatting, while a handful of customers perused wedding jewellery and gemstones. No customers were at the counter dedicated to gold-bar purchases.

“We’re not seeing the kind of crazy buying we saw last year,” said store manager Karone Huang. Last year, “we couldn’t even fill our orders fast enough. That’s how busy we were.”

A big reason, Huang said, is that many in China believe they already have enough gold on hand. And the rebound in prices in the past three months hasn’t been big enough to attract new buyers, she said.

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