Central Bank Buying, Gold ETF Flows Cloud Price Outlook

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Gold proved hugely popular in China during the first half of the year, particularly in the second quarter when price falls prompted traders to stock up and helped push imports for the half year to 570 metric tons, ahead of India. Don’t miss our related article: What Paulson & Co, China, India Teach Us About Future Gold Prices.

But Reuters argues in a recent article that a gradual recovery in the Chinese economy during the second half could see investors looking for alternative opportunities and gold may fall out of favor.

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What do central banks buying gold have to do with all of this?

Even central bank demand, a significant factor in the metal’s rise up to August 2011, has been largely absent. As happens so often with central banks, they buy when the price is high and either sit on the sidelines or sell when its low. Central bank buying was still positive at 71.1 tons in the second quarter, but this was the lowest in two years and about half the rate of buying in 2012.

The gold price has gone through something of a rally this month on the back of the import numbers from China and India, and short covering as the price broke through some technical levels. But Mark Keenan, a cross-commodity research strategist at Societe Generale in Singapore, is quoted by Reuters as saying: “These levels are largely technically driven. They are unsustainable,” he said, adding “We will get fresh QE tapering indications in the next Fed meeting in September. The tapering is likely going to start taking effect then and gold will fall again.”

Lower central bank buying, net outflows from ETFs and a slowdown in Indian and Chinese buying would certainly result in price falls. If quantitative easing tapering moves back up the political agenda next month, investor sentiment can be expected to lead south even if the fundamentals haven’t caught up. All in all, the upside for gold will be hard fought.

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