Gold price falls as Asia purchases dwindle

Posted on August 16, 2012

Global demand for gold is seeing a significant slowdown as top consumers in India and China pare purchases amid weak economic growth, abruptly halting a consumption boom that started five years ago with the onset of the financial crisis.

The consumption slowdown is driving prices downward, denting the profitability of gold miners such as Barrick Gold of Canada and New York-listed Newmont and hurting top hedge funds managers such as John Paulson and George Soros.

    The World Gold Council, a lobby group for the gold miners, on Thursday said demand for the yellow metal fell to 990 tonnes during the second quarter, the lowest since the first quarter of 2010 and down 7 per cent from last year.

    “India and China represent half of global gold consumption and clearly we are seeing a slowdown in both markets,” Marcus Grubb, managing director for investment at the London-based WGC, said in an interview.

    Gold prices have fallen back to about $1,600 a troy ounce, down nearly 17 per cent from the all-time high of $1,920.30 an ounce set in September 2011. But gold prices remain significantly higher than five years ago, when the metal traded at about $650 an ounce. Since the first signs of the financial crisis emerged in mid-2007, corn, gold and oil have been the best performing assets.

    India, which traditionally has been the world’s largest gold consumer but is about to be surpassed by China, has seen the weakest demand recently due to a combination of slow economic growth and high prices in local currency. The Indian rupee has fallen nearly 25 per cent against the US dollar over the past year, lifting the price that Indians pay for gold to nearly record highs.

    India bought 181.3 tonnes of gold in the second quarter, a two-year low, and the industry believes that purchases will remain weak for the rest of the year as prices in local currency remain high and a weak monsoon, the seasonal rains, hurts agricultural production, cutting rural demand for the yellow metal.

    Mr Grubb said that India was likely to close the year purchasing just 750 tonnes of gold, down a hefty 25 per cent from last year and the lowest in five years. China, which is on track to buy 850 tonnes, will overtake India to become the world’s largest consumer of gold, according to the WGC estimates.

    Gold traders are cautious however about writing off India as main source of demand as some did in 2009 when consumption also fell sharply because the local economy and currency weakened. As soon as activity picked up and the rupee strengthened against the dollar the following year, gold purchases bounced back nearly 75 per cent, rising in 2010 to a record high of 1,006 tonnes.

    Investment demand in Europe and the US through exchange traded funds, a vehicle that allow investors to easily buy titles backed by gold bars, stagnated in the second quarter, with inflows at nearly zero tonnes. Gold ETFs inflows stood at 54 tonnes in the April-June period of last year.

    “The wild card is what will happen to investment in the second half and that will be driven by QE [quantitative easing, or central banks printing money] in the US, the eurozone and even emerging countries like China,” Mr Grubb said.

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