Analysts See Strong Gold Demand As China Celebrates Lunar New Year
(Kitco News) - Analysts are optimistic when it comes to Chinese gold demandfor the Lunar New Year, stating that they expect to see strong growth despitehigher gold prices.
China is already seeing an improvement in gold demand ahead ofthe Lunar celebrations, which will usher in the year of the Dog on Feb. 16. Theoccasion has historically been a key gold-buying opportunity for consumers in acountry that remains the largest gold-consuming nation, followed by India.
“Things certainly started to pick up in the end of the yearand we expect to see that continue into 2018,” Daniel Hynes, ANZ seniorcommodity strategist, told Kitco News. “We [also] saw relatively strong demandcoming through in January, leading into [the] Chinese New Year. We expect tosee double-digit growth in demand in 2018.”
Capital Economics analyst Simona Gambarini also projects solid demand for the Lunar New Year.
“Based on the local premiums to international gold prices, it appearsthat demand ahead of the Chinese New Year has been relatively strong,”Gambarini said in an email.
But, she warned that she is not as positive when it comes to 2018as a whole, adding that Capital Economics expects to see a slight drop duringthe year.
“First, we expect the renminbi to appreciate this year, whichshould reassure investors who had previously sought the safety of gold. Second,jewelry demand for gold has been on a downward trend since 2013 . . . we don’tthink that this is the beginning of an upward trend,” Gambarini pointed out.
“Third, the PBOC [People's Bank of China] hasn’t added any goldto its official reserves since October 2016. With gold prices now higher, thevalue of the bank’s gold reserves has also gone up, reducing the incentive tobuy more gold,” she noted.
Here Is What Could Drive Gold Demand
Those projecting an increase in demand are keeping an eye on bothseasonal factors as well as changes in regulation.
“Certainly, previous restrictions on quotas for importing gold[have] weighed on the sector and are slow lifting,” Hynes said.
Also, increasing housing pressures are likely to benefit gold,both in the investment and retail spaces.
“With increasing pressures on the housing sector, safe-havenasset classes, such as gold, will start to benefit even more in the near term,”Hynes said. “Due to constraints placed on housing industry in China due toexceptional growth, prices have subsided and investors started to look at otherasset classes, and certainly gold has been benefiting from that.”
Higher Gold Prices Are Not An Impediment
Gold prices rose in January to 1.5-year highs on the back of aweaker U.S. dollar. Since then, gold has retreated, but still remains firmlyabove the psychological level of $1,300 an ounce.
Analysts say that higher prices are unlikely to impact Chineseconsumers during the Lunar New Year, but warned that volumes might beaffected.
“For the Indian market, we’ve seen that consumers have a setwallet, which they’ll use to purchase gold. Although China has a slightlydifferent type of market in terms of patterns and trends, high prices will notbe a hindrance to stronger demand,” Hynes said. “Yet, volumes can be impactedby higher prices, but that phenomena hasn’t played out in China just yet.”
Turbulence within the Chinese equity space is also expected todraw investors, despite rising gold prices.
“Higher gold prices are not expected to meaningfully dampendemand during [the] Chinese New Year, which will be buoyed by the recent volatilityin Chinese equities, with the Shanghai Composite Index now down over 12% fromits recent highs,” the chief economist at ABC Bullion, Jordan Eliseo, said in an email to KitcoNews.
China’s Gold Trends
China remains the world’s largest bar and coin market, with 306.4metric tons of investment in 2017, according to the World Gold Council’s latestGold Demand Trends report.
“Annual demand was 8% higher compared to 2016 and comfortablyabove its five-year average of 284.8t,” the WGC said.
The jewelry side of the equation still remains weaker than theinvestment side, said Hynes.
“This is in part because of the anti-corruption campaign that hasbeen undertaken during the past few years, which impacted demand there. Itcertainly been more on the investment side that we’ve seen a bit of growth,” heexplained.
But, the WGC remains confident in the jewelry demand, estimatingan uptick in the near future.
“The outlook for Chinese jewellery demand is, we believe, quitepositive. Retailers continue to better meet consumers’ changing needs andsentiment is lifted by the supportive economic environment,” the WGC reportsaid.
In 2017, China saw a 3% rise in annual jewelry demand, which marked the first increasesince 2013.
“The trend for lower-weight, better designed, higher-margin‘premium’ gold jewelry products continues to gather momentum,” the WGC added.
By Anna GolubovaFor Kitco News
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agolubova@kitco.comwww.kitco.com Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.