China Gold Buying Means Price Floor to Standard Chartered

The cheapest gold in four years is proving irresistible for shoppers in China and India, where rebounding demand may signal an end to the longest price slump in more than a decade.

Purchases in Asia will help support prices that are headed for the first two-year decline since 2000, Standard Chartered Plc said. While surging equities and tame inflation have eroded gold’s appeal as a hedge, sending bullion tumbling to $1,132.16 an ounce today, prices are nearing the lows forecast by banks from Citigroup Inc. to Goldman Sachs Group Inc.

China supplanted India as the world’s largest buyer last year, when the metal plunged 28 percent. Jewelry and bullion are viewed in both countries as a store of value and are popular as gifts. China’s gold imports from Hong Kong in September were the highest in five months. Indian jewelers are forecasting a surge in fourth-quarter sales.

“There is a floor around $1,100 set by Chinese retail demand,” Paul Horsnell, head of commodities research at Standard Chartered in London, said by e-mail on Nov. 5. “Physical demand indicators out of China and India are firming.”

Gold demand in China will rise 20 percent in three years, the World Gold Council forecast in September. The country’s net imports from Hong Kong that month totaled 61.7 metric tons, the most since April, according to calculations by Bloomberg News based on data from the Hong Kong Census and Statistics Department on Oct. 27.

Festival Buying

The All India Gems & Jewellery Trade Federation has said fourth-quarter imports of the metal may jump 75 percent. Gold is often bought during the year-end festivals, and during the wedding season, it is part of many bridal trousseaus and as gifts in the form of jewelry.

Gold for immediate delivery has lost 2.5 percent this year and traded at $1,171.51 at 3:12 p.m. in New York. The Bloomberg Commodity Index of 22 raw materials declined 6.4 percent in 2014, while the MSCI All-World Index of equities climbed 2.3 percent. The Bloomberg Treasury Bond Index advanced 4.7 percent.

Coin collectors also are buying. The U.S. Mint has sold 30,500 ounces of gold coins this month, about half the average monthly total since August, after October sales reached 67,500 ounces, the most since January. The Mint ran out of American Eagle silver coins after selling 1.26 million ounces since the start of the month, a spokesman said in a Nov. 5 e-mail.

Dollar Downer

To other investors, the selloff in gold is far from over, with the rallying dollar curbing demand for the metal as a store of value. The greenback rose to a five-year high against a basket of 10 currencies.

Gold will end the year at $1,100 and keep sliding to $800 by the end of 2015, Georgette Boele, an analyst at ABN Amro Group NV in Amsterdam, wrote in a Nov. 5 report. The chances are increasing that it will slip to $1,000 as oil prices tumble and the U.S. economy improves, Societe Generale SA’s Michael Haigh, an analyst who correctly forecast gold’s 2013 rout, said Oct. 30.

“The reasons to hold gold are getting smaller and smaller,” Sameer Samana, a senior international strategist at Wells Fargo Advisors LLC in St. Louis, which oversees $1.4 trillion, said in a Nov. 5 telephone interview. “The dollar will continue to trade strong since there is a divergence between the U.S. economy and other major economies in Asia and Europe.”

Reduced Holdings

Investors have cut holdings in gold-backed exchange-traded products by 38 percent since they reached a record in December 2012, data compiled by Bloomberg show. The 1,634.8 metric tons now held is the least in more than five years and valued at $60.2 billion.

Hedge funds and other money managers have reduced bullish bets on gold by 51 percent since early July, U.S. Commodity Futures Trading Commission data show.

David Wilson, an analyst at Citigroup, said he expects gold to trade between $1,100 and $1,200 in the short term. Michael Widmer at Bank of America Corp. in London predicted a drop to as low as $1,100, and Barnabas Gan, an economist at Oversea-Chinese Banking Corp. in Singapore, forecast $1,150 by year-end. Goldman’s Jeffrey Currie said he expects $1,050 by the end of December.

Gold Production

Some higher-cost mining companies are already losing money on production. Gold’s drop this week took it below output costs for seven of 19 mining companies tracked by Bloomberg Intelligence. Two more were within $50 of the figure.

Unprofitable mine output will cause producers to shelve plans and help limit gold supplies, according to Caroline Bain, a commodities economist at Capital Economics Ltd. in London. She said prices will probably rebound to $1,200.

“We are building our gold position very gradually,” Peter Sorrentino, senior vice president at Huntington Asset Advisors in Cincinnati, said in an interview Nov. 5. He helps oversee $1.8 billion. “We are still favorably disposed to accumulating. Gold has become a victim of dollar strength.”

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