• Physical demand not seen as likely to spur bullion price
  • Rising wealth in China and India forecast to boost demand

Gold bulls argue that the growing middle classes in China and India will boost demand as richer consumers covet more rings and pendants. Australia’s second-biggest producer cautions investors against getting too carried away by these forecasts.

“I just don’t think it’s a demand equation that’ll make a big impact,” Jake Klein, executive chairman of Evolution Mining Ltd. said Wednesday at the Bloomberg Summit in Sydney. He previously ran a producer that became the first foreign company to operate a gold mine in China. “Yes there’ll be increased physical demand, but the gold market is so dominated by financial issues, inflation and the U.S. dollar, that it’s not going to make a huge difference.”

Gold prices are trading at the lowest in five years as investors shun the metal amid a stronger dollar and on the outlook for a rise in U.S. interest rates, which curb the allure of bullion. A U.S. rate rise, low inflation and selling from exchange-traded products will continue to pressure gold, Barclays Plc said last week. On top of that, Klein argues bullion is failing significantly to respond to traditional catalysts such as global uncertainty and cuts to output.

Demand Engine

According to the World Gold Council growth in demand for gold in China, the biggest producer and consumer, will rise as the nation’s middle class swells by about 500 million people in the next five years, adding to jewelry purchases and investments. India is acting as an engine of demand, raising gold jewelry purchases by 15 percent in the three months to Sept. 30 compared with the same period a year earlier, the council said in a report this month.

“I just haven’t seen that impact on the gold price,” Sydney-based Evolution’s Klein said. “There’s a lot of gold still sitting in safes that people can take out and sell to increased Chinese and Indian demand.”

Bullion for immediate delivery fell as much 0.5 percent on Wednesday to $1,064.55 an ounce, the lowest since Feb 8, 2010. The metal has slumped about 10 percent this year.

While jewelry accounts for about 60 percent of total gold demand, purchases of coins and bars for investments are showing the largest growth, expanding 27 percent in the third quarter as jewelry purchases jumped 6 percent, according to the council.

Rising physical demand in Asia is providing an additional layer of support for gold prices, though won’t act as a significant catalyst as investors cut their precious metals holdings, Jordan Eliseo, chief economist at trader Australian Bullion Co. in Sydney, said by phone.

Outflows from U.S. exchange-traded funds backed by precious metals have reached $1.12 billion so far in November, heading for the first monthly loss since July, data compiled by Bloomberg show. “For the gold price to rise significantly higher, you are going to need to see Western investors regain their appetite for precious metals,” Eliseo said.

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