MUMBAI – Signs that the world’s second-largest economy China, is gearing into a formal monetary tightening cycle was apparent on Saturday, when the country’s central bank raised interest rates for the second time in two months.
Analysts maintained that gold would get pounded and the dollar rebound as a consequence.
But, on Monday, India’s gold demand was moderate as prices softened a touch on the back of a stronger rupee, and the news from China. However, on Saturday, December 25, gold broke through its five-days losing streak to rise marginally on mild-buying by retailers in Mumbai.
Traders said firmer trends in the global markets and the underlying appetite for the yellow metal continued to remain strong.
“Several buyers are waiting by the kerb for bigger dips as the year comes to a close,” said M Jhaverimal, a gold retailer in Mumbai.
He went on to add that overall, 2010 proved to be a solid year for gold, as the metal rose beyond 26%, after rising 24% in 2009 and 5% in 2008. “If one looks back, prices have not posted a negative annual return since the year 2000,” said Jhaverimal.
Bullion trader Ashish Shah added that the fundamentals for gold were supported by the lack of significant increase in mine outputs during 2010, and a fall in scrap gold sales.
“A sizeable chunk of the Indian population may still be living below the poverty line, but when it comes to buying gold, we are right up there in the front,” Shah added.
Though Indians spent around $ 6.9 billion to buy gold in the first three months (January-March) of the calendar year, and clearly gold demand in India is up, the question doing the rounds is, is it enough?
The figure is nearly ten times the $ 708 million that Indians spent to accumulate gold in the same period of the previous year. This clearly shows that the Indian consumers interest for the precious metal has grown by 10 times since the past year, Praful Sonawala, gold and diamond jewellery exporter said.
“Take a look at China. Its gold imports have already soared to a record 209 tonnes this year, putting it on track to overtake India as the world’s largest consumer,” he said.
China, already the largest bullion miner, imported more than 209 tonnes of gold during the first 10 months of the year, a five-fold increase from an estimated 45 tonnes last year. This clearly indicates that Beijing has overtaken India as the world’s largest consumer of gold.
China is also seen to be expanding its gold buying options for domestic buyers. The country’s regulatory authority has reportedly given its domestic mutual funds a nod to invest in gold ETFs (electronic traded funds) outside China.
The Industrial and Commercial Bank of China has also launched a gold accumulation plan for investors in mainland China. The daily payment scheme is very meagre, paving the way for small investors to invest in gold.
According to a report in a Chinese daily, when the People’s Bank of China announced the interest rate hike, Xia Bin, an advisor of the People’s Bank of China said that China should hold more gold reserves to diversify its forex reserve.
In a recent announcement, the World Gold Council said that as of mid-December, the United States remained the top country to hold reserves in gold and that the Chinese mainland ranked sixth with 1,054 tonne of reserves.
However, in spite of the Chinese mainland’s huge foreign exchange reserves, its gold reserve accounts for only 1.7% of total reserves. This only goes to show that China’s gold reserves are the lowest among the top 20 in terms of proportion.
India’s foreign exchange reserves, on the other hand, totalled $294.6 billion, down from $295.41 billion, as on December 10. According to a release from the Reserve Bank of India, foreign currency assets amounted to $265.4 billion, also down from $266.2 billion recorded in the previous week. At the same time, gold reserves remained unchanged at $22.12 billion.
“Both gold and silver are overbought at the moment. Technically, the market needs a severe correction,” said Shah, “But, the EU economy is still fragile, as are Japan and South America. Investors will still put money in gold,” he added.