How Eastern Gold Demand Is Transforming The Gold Market

In this article, Bron Suchecki, analyst at the Perth Mint in Australia and blogger at GoldChat, discusses his observations of a recent gold conference in Singapore (source: www.kereport.com).

In general, the important themes that were discussed during the gold conference were the flow of gold from West to East as well as the gold price setting methods currently dominated by the London Fix. In that respect, it is interesting to note that some of the Asian exchanges are trying to establish an Asian price benchmark for gold. Bron Suchecki confirms the Asian focus on the physical aspect of gold, as evidenced by the comments on the conference but also by the Singapore Stock Exchange which is launching a gold kilobar contract. That contract is a physical delivery contract only with no cash settlement. One of the interesting characteristics in the terms and conditions is that the buyer will be “punished” with a 10% penalty if he will not settle physically.

Chinese people and investors have a truly different view on gold, especially compared to the perception in the West. Gold plays a fundamental role in their culture. Top representatives of the China Gold Association and Shanghai Gold Exchange explicitly pointed out how Chinese culture is one of the key drivers of the gold flow from West to East. As quoted during the conference, their belief is that gold plays an important role as a universal asset in an environment with different currencies. Similarly, they believe that the long term role of gold will become more important in financial markets (offering safety in an uncertain financial environment). These prospects lead to expectations of (much) higher gold prices in the future.

The same officials from the China Gold Association and Shanghai Gold Exchange pointed out that the current flow from East to West should continue for at least one or two decades. With the East accumulating gold for such a long period of time, they expect the West to turn into net buyers at a certain point in the future. Those conditions will lead to much higher gold prices; one of the officials expressed openly a gold price prediction of 10 000 USD. Mind that these statements are not coming from speculators, but from high ranked representatives.

With his strategic position at the Perth Mint, Bron Suchecki has an excellent view on the gold market. The current situation, specifically at the Perth Mint, is characterized by no (significant) selling but also by a lack of new buying (especially at the private individual level). Last year’s selling has been concentrated in the ETF’s and short term trading (on the institutional level like hedge funds). Selling appears to be exhausting at this point, which is an important evolution.

Large traders like hedge funds are focused on three things: the technical price chart setup, market sentiment, and positioning on futures exchanges. The technical picture seems to be stabilizing and preparing for a turn around; market sentiment is as bad as it can be; futures positions are slowly getting more positive. These factors are most likely pointing to a lasting bottom and consolidation phase in the 1200 to 1300 USD price range. The downside seems limited although it will take a while for confidence to return. When hedge funds enter the gold market, they will for sure push the gold price higher.

New institutional money could bring renewed retail interest. But the more important factor at retail level will probably be a revaluation of the economic situation. Currently, the central bank narrative is still prevailing. When it becomes clear that the economy is stagnating and that central banks did not fundamentally help the economy, financial protection is likely to become a hot topic in investors’ minds again.

Will there be enough gold in the market when gold investment demand will start rising in the West? That is an interesting question, and the answer according to Bron Suchecki is “yes, but at the right price.” There is always enough gold in the market, mainly because gold has a huge stock, compared with “regular” commodities. Gold is flowing in huge amounts to the East and it disappears from the market as available supply. So increased Western gold demand could lead to a squeeze because existing holders will be the suppliers, and they will only offer the metal at higher prices.

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