Lower Gold Prices Continue to Spur Demand for the Physical Metal

Gold prices advanced on Tuesday for a third straight session after prices suffered another massive sell-off on the paper market of Comex last week. The price of spot gold hit an intra-day high of $1268.70 an ounce on Tuesday in early trade London trade, but then backed off before the second fix.

Traders who have been forced to cover their short positions as the price of the yellow metal has bounced from its recent low of $1180 an ounce, have helped fuel the price rise. While some traders see this is as a short-covering bounce, other traders see the price as being terribly oversold. But no matter how one views the price, the demand for physical gold continues to be very robust.

Bullion dealers around the world continue to struggle to find adequate supplies as demand remains strong, especially in the Middle East where concerns about inflation and geopolitical risk with regard to Syria and Iran is leading to very robust demand.
In an article published on June 28 in The National of Dubai, there is not enough space on airlines flying into Dubai to meet the rapidly rising demand for physical gold in the emirate since the price plunged to record lows this week.

The price drop led to a rush of buyers for Dubai gold from the Middle East, South East Asia, the Balkans, Turkey and parts of Europe according to Tarek El Mdaka, the managing director of Kaloti Gold in Dubai.
“I cannot find a place for transporting gold on Emirates, on BA on Swiss Airlines this weekend,” Mr El Mdaka said. “I am shipping in one-and-a-half to two tons of gold every day and it is going straight out.”

According to state-owned China National Gold, China’s gold consumption is set to exceed 1,000 tons this year, having already reached about 800 tons in the first half.
“Physical gold sales reached about 800 tons in the first half … I expect full-year sales to exceed 1,000 tons,” Sun Zhaoxue, President of China National Gold Group Corp, told reporters at the side-lines of a financial conference.
China’s 2012 gold consumption was 832.18 tons, up 9.35% from a year earlier, showed data from China Gold Association. Consumption in China, the world’s second-largest consumer after India, jumped more than 36% to 456.2 tons in the first four months of the year.
A price correction in April sparked frenzied buying with consumption reaching about 137 tons in that month alone, according to the gold association.
Gold shops in Bangkok’s Chinatown are seeing robust demand as people continue to buy gold at these lower prices.
The recent drop in gold prices on the Lao market has brought buyers out in droves to purchase gold while it remains cheap according to the Vientiane Times. According to gold shops in Vientiane, sale prices yesterday were at 5,060,000 kip (US$655) per baht-weight for gold jewellery – down about 500,000 kip per baht-weight on previous months. Large numbers of buyers have visited gold shops in Vientiane to purchase gold jewellery, coins and bars as in investment and in order to protect from currency devaluation. Some shops in Laos’ capital were stripped bare of all of their gold as a result of the gold rush – or rush out of cash as it might better be known as.
Meanwhile, the Reserve Bank of India (RBI) continues its offensive against gold. Last Tuesday, it imposed restrictions on the country’s regional rural banks, or RRBs, for lending money against gold, in an attempt to discourage demand for the precious metal and reduce its imports. As from July 01, the Indian gold jewellery body All India Gems and Jewellery Trade Federation (GJF) will halt the sale of gold coins at all their member outlets with effect. The announcement caused panic among the investors who were uncertain about the fate of the gold savings schemes and pushed premiums up by almost 100%.  Gold jewellers across the country launched a range of gold savings programmes during the price crash in April. Such programmes allow investors to deposit money in installments in order to buy gold coins for collection in the future.
The member outlets have confirmed that all such programmes will continue as per schedule. The customers will be delivered the promised quantity of gold, but it may be in the form of jewellery. According to statistics available, sale of gold bars and coins constituted almost 35% of the total gold imports by the country last year. The move by GJF to stop the sale of coins is aimed at curbing gold imports. Despite these measures enforced by the Indian government, it seems as if the demand for physical gold remains robust in India.
While the demand for physical gold continues in the East, individuals in the West are cutting their bets on the precious metal. Investor sentiment seems to be about as bad as it can get, even worse than after the 30% fall in 2008 as almost every single investment bank sends out another bearish report on gold.
The price of gold has tumbled once again this time by around $125 an ounce since the US Federal Reserve indicated that it may taper its stimulus programmes.  The 25% drop in prices of gold during the second quarter represents the biggest quarterly decline since Reuters began tracking gold prices in 1968.
And, while the world’s No. 1 gold ETF, the SPDR Gold Shares, reported the biggest one-day drop in its holdings in more than two months at 16.23 metric tons last  Tuesday, which brought the fund’s total outflow for the year to 381 tons, not much attention is being paid to the rapid decline in Comex gold inventories.

Since the beginning of the year, total COMEX gold inventories have fallen 32%, from 11 million ounces in January to around 7.5 million ounces. Its seems that as the paper trading in the precious metal markets keeps pushing the price of gold lower, investors continue to liquidate their holdings in GLD, yet, continue to withdraw more physical gold out of the COMEX warehouses.

Although, the price of gold fell by some 25% in the second quarter although very little has changed regarding the positive supply and demand dynamics of the gold market. And, I remain confident that the recent price falls are part of a massive correction in a larger secular gold bull market that will propel prices much higher in the coming months and years.
Technical analysis

The price of gold has now fallen back to levels last seen in 2010. Although prices have rebounded from recent lows, prices will need to trade back above $1350/oz., to see some strong upward momentum.