China and India calling the gold tune

With ever growing economies it would seem that China and India are becoming the key price stabilisation element in the global gold market and limiting any serious downside risk.

Author: Lawrence Williams
Posted: Friday , 26 Mar 2010

LONDON -

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It may not have been a great week for gold, with prices falling before a small recovery on Thursdayand a further bounce back so far today, but the most interesting thing to note about recent price patterns is that every time gold falls a little, resistance comes in as investors somewhere come in and buy on the dips. The reverse may also be true of course in that in the current climate there appears to be an upwards resistance showing around the $1120 mark, but in reality the recent falls from this kind of level have largely been related to Euro zone currency weakness and perceived corresponding dollar strength - not fundamental supply/demand - not that the gold market has been paying much attention to fundamentals.

It is the Asian markets though that would now seem to be driving the prices - notably China and India - although other Eastern and Middle Eastern states with a history of allegiance to gold both as a store, and recognition, of wealth will also be contributing. India may be the most important, at the moment given the big fall in demand of last year, and it now seems to be in the process of coming to grips with the plus $1,000 gold price. It is notable that after the hiatus, Indian gold imports are beginning to pick up again, and although well off the peaks of three years ago, they look to be staying well ahead of last year's extremely low monthly figures.

In terms of Indian purchase levels, this is a necessary process. Gold in India has always been relatively price sensitive and there is usually resistance to sharp upwards moves, but once it is seen that the price is stabilising at the higher levels, then volume purchasing returns and it would appear that that process is again coming to the fore. India is the world's biggest gold consumer and although much of the purchases are in jewellery form, this is somewhat different to Western jewellery purchases because mark-ups are minuscule in comparison - thus Indian jewellery is also a store of wealth as well as a pure adornment.

China, as the growing elephant in the gold market, is having an ever greater impact and it is expected that before long China will overtake India as the world's largest gold consumer on a regular basis. The country's burgeoning middle classes are also inclined towards precious metals purchases as a wealth indicator and protector - and this has been being encouraged by state organisations. Given the official backing it seems unlikely the Chinese government will let gold slip far if there is downward pressure as the Chinese will be aware that comparatively minor moves, like the purchase of some of the remaining IMF gold, will likely move the gold price upwards again fast. China has so far not felt the need to buy the IMF gold, whatever Western observers have said in the past. It is quite capable of building up whatever it wants in the way of gold reserves through purchasing its own mined production now that it is the world's largest producer of the metal.

Thus with the wealth generating populations of the two Asian mega-economies predisposed to buy gold anyway, it does indicate an underpinning of the price at, or near, current levels and market movements suggest this is already happening. Thus gold's downside risk would appear relatively small at the moment. The upside potential is less certain though as there is currently a definite falling off of purchases when gold rises above a certain level - currently around $1120. While the level at which such a fall-off occurs is likely to increase gradually, it will require some other stimulus to nudge gold upwards significantly, but with global economies and the dollar remaining vulnerable, this could occur sooner rather than later. At this stage gold may remain pretty flat until after the summer - but then who knows? A significant positive move still se