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Weak Asian demand to reverse gold’s rally, prices to fall below $1,400 - Capital Economics

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Weak Asian demand to reverse gold’s rally, prices to fall below $1,400 — Capital Economics

(Kitco News) - Gold imports from India and China once again disappointed in August with the trend likely to continue and begin to weigh on prices starting next year, said Capital Economics.

“Gold imports in China and India remained extremely weak in August. With local currency prices likely to stay elevated, and growth in China set to slow, a turnaround in demand is unlikely anytime soon,” wrote Capital Economics assistant economist Franziska Palmas. 

China’s gold imports tumbled 40% on an annual basis in August, according to the data released by the Chinese customs authority on Wednesday. China imported more than 75 tonnes of gold during the eighth month of the year, which is better than the previous few months but still very low from a historical perspective. 

“China’s imports of gold recovered a bit in m/m terms in August mainly due to a pick-up in shipments from Singapore and Switzerland. However, in year-on-year terms imports fell sharply by 40%,” Palmas said.

On top of that, jewelry sales and withdrawals of gold from the Shanghai Gold Exchange (SGE) were both below their seasonal norm in August, added Capital Economics.

Higher gold prices and slower economic growth in China are to blame for lower gold imports, Palmas continued.

“We think that two main factors are behind this broad-based weakness. One is the recent surge in the local currency price of gold on the back of the rally in the dollar-denominated gold price and the sharp depreciation of the renminbi. The other is a general slowdown in economic growth in China, which has dampened consumer demand for gold,” she wrote.

India’s gold imports also plunged, falling 73% in August on an annual basis, touching three-year lows, as the country only imported 30 tonnes of gold.

“Surging local currency prices also weighed on gold imports in India … Admittedly, the hike to the import duty on gold at the beginning of July probably led to an increase in gold smuggling in recent months. However, we suspect that government measures kept smuggling well below previous peaks, which means that the gold import figures probably only slightly overstated the weakness in demand,” Palmas highlighted. 

What this means for gold prices going forward is that the rally is likely to reverse and prices will decline back to the $1,350 level by the end of next year, the note by Capital Economics stated.

“Soft consumer demand will weigh on the gold price over the coming year. This, together with our view that U.S. Treasury yields will rise further as the Fed disappoints investors’ expectations for aggressive easing, underpins our forecast for the gold price to drop back to $1,350 per ounce by end-2020,” Palmas said.

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