Gold prices are usually guaranteed to generate considerable disagreement about future direction – it’s a metal with perennial bulls supporting an ever-higher price and equally committed bears who see no justification in a price much higher than the cost of production.
The current position is no different, with arguments for further price rises matched by those calling for falls. News that one of the biggest bulls, Paulson & Co. Inc., had sold some 1.1 million ounces held in the SPDR Gold Shares (GLD) ETF during the second quarter was matched by news that the wider ETF gold holdings saw losses of 402 metric tons of gold between April and June.
Not surprisingly, the gold price crashed to a near-three-year low of $1,180 a troy ounce at the end of June, according to the FT, but not as widely reported was the counterbalance to that news that as Paulson sold ETF holdings, he bought OTC gold swaps. Far from abandoning gold, Paulson was migrating to a more cost-effective strategy to access what he sees as an inevitable rise in the gold price given time.
News from the wider gold market, though, isn’t encouraging.
A Reuters article reported recently on a recent World Gold Council quarterly report, which details the highly volatile nature of the market this year. On the one hand, China and India have been importing record quantities, India buying 310 tons in the second quarter, up 71% from the same period in 2012 and 21% above first quarter purchases.
China bought 275.7 tons in the second quarter, a jump of 87% from the same period last year, but the paper points out that this is 6% below the first quarter’s demand. Even so, the net outflows from ETFs mentioned above countered emerging market demand to leave a 12% drop in demand from the same period last year. Bulls suggest both India and China could be on track for 1,000 tons of imports this year, but there are headwinds that can’t be ignored.
Delhi is desperately trying to reduce the current account deficit and has raised import tax on gold several times this year, mostly recently from 8% to 10% in an effort to dissuade imports of the country’s second-largest import after oil.
Physical gold demand in India, though, is said to be strong, particularly with the festival and marriage season approaching, but as we have reported, consumer (along with business) confidence is falling, with car sales being a prime example. Gold is a discretionary spend and it may be optimistic to expect volumes to remain at first-half levels in the face of high import taxes and a stagnating economy.