February's lower gold price is waking up India and China demand, markets are eyeing FOMC meeting minutes this week
(Kitco News) Gold continued its trend lower Tuesday, but falling prices are boosting demand out of India and China, according to analysts. Markets are shifting their focus to the FOMC meeting minutes this week after repricing Federal Reserve rate hike expectations.
In February, the gold market shed around $100, with April Comex gold futures last trading at $1,845.30 an ounce.
But lower prices are working in favor of the retail buyer in Asia, which suggests there could be a price floor in gold's recent selloff, said Commerzbank analyst Carsten Fritsch.
This is visible by looking at rising premiums in India and China. "Gold traders in India responded by demanding a premium of $2 per troy ounce on the official local price. The week before they had been forced to grant a discount of $18 per troy ounce. The higher demand is meeting with reduced supply after gold imports were postponed in anticipation of a possible cut in import tax that did not then materialise," Fritsch noted.
India's gold imports plummeted 76% in January from a year ago as demand dropped due to rising local prices and higher import duty.
The higher import duty forced jewelers to wait before purchasing more gold, hoping the government would decide to lower the import levy. There was hope that India would cut the import duty in its annual budget presented on February 1. But that didn't happen. Instead, India raised its silver import duty to align better with gold.
In China, premiums were also raised by local sellers, Fritsch added. "Traders in China raised their price premium to $16-27 per troy ounce from $12-15 in the previous week. Jewellery retailers there are replenishing their stocks following the New Year festivities," he said Tuesday.
The rising demand points to how price-sensitive gold buyers are in the world's top two gold-consuming nations.
What this means for the global price of gold is that the overall move down could be limited, Fritsch pointed out. "Though this does not mean that they are able to drive prices significantly up, they can preclude or at least slow any further price fall," he said.
On the macro level, the gold market is still digesting higher rate hike expectations that were triggered by robust U.S. data published last week.
"Gold fell to a six-week low last week amid hawkish comments from Fed officials. Two higher-than-expected inflation prints saw policymakers Mester and Bullard suggest further aggressive rate hikes may be warranted. The USD and Treasury yields both climbed, creating headwinds for the precious metal," said ANZ senior commodity strategist Daniel Hynes.
This week all eyes are on the FOMC meeting minutes from February, but analysts note that its impact will be limited due to its timing. The last Fed meeting took place before the strong U.S. jobs and higher-than-expected inflation reports were released.
"The minutes from the Federal Open Market Committee meeting from three weeks ago should provide better insight into how hawkish the Fed remains after recent remarks by central bankers that suggested a return to 50 basis point hikes was on the cards. These hawkish comments were the trigger for gold's price fall, so holders of the precious metal will be hoping that the minutes prove more dovish," said Kinesis Money market analyst Rupert Rowling.
Markets are worried that due to stubborn inflation and a strong economy, the Fed could return to 50-basis-point hikes. But many analysts do not agree with this view.
"Having done 25bp in February, we think this will be the standard incremental move from now on," said ING chief international economist James Knightley.
His outlook is that the strength in the economy that the U.S. saw in January was likely only temporary. "The big shifts in weather may have simply meant that spending that would have been done in February and March may have been brought forward, leaving open the possibility of a correction over the next couple of months," Knightley said.
Other data releases markets are closely monitoring include Thursday's U.S. GDP Q4 and Friday's U.S. PCE price index.