A six-month high for the spot price of gold has been reached on optimism that the monetary tightening in western nations is almost complete.

Although indications that the Federal Reserve of the United States and other western central banks have completed raising interest rates are encouraging for precious metals, they are not the only one.

More than half of the physical gold market is accounted for by China and India, two Asian heavyweights that will undoubtedly have a significant impact on the future course of prices.

Gold is nearing record highs in local currency terms in China and India, and there are indications that this may be beginning to affect retail demand in both nations.

Monday saw spot gold hit a six-month high of $2,017.82 an ounce, up 11.5% from the previous low of $1,809.50 on October 6.

Gold’s price per ounce in Indian rupees on Monday was 168,145, not far from its record high of 169,401 set on May 4. It has increased by 11.8% from its most recent low of 150,401 rupees on October 6.

Although the demand for gold in India has been strong thus far in 2023, mirroring the strength of the country’s economy, it seems that some impetus may be leaving the market.

In the midst of concerns of weak demand for the impending wedding season, dealers’ discounts off official domestic prices—which include 15% import and 3% sales levies—doubled to $6 per ounce last week.

In China, things are going similarly; last week, the premium above spot prices dropped from $43 to $58 to $20 to $40 per ounce.

Hong Kong imports, which decreased in October for a second consecutive month, serve as another indicator of China’s demand.

Based on data from the Hong Kong Census and Statistics Department, China’s net imports from Hong Kong fell 23% to 26.793 metric tonnes in October from 34.757 tonnes in September.

The main causes of the weak import demand are probably higher pricing and ongoing economic uncertainties in the greatest gold-consuming nation in the world.

Monday’s spot gold price in Chinese yuan closed in on the record high of 14,701 yuan set on October 27. It was trading at 14,433 yuan an ounce.

The price has risen by 15.7% from its mid-February 2023 low of 12,479 yuan.

Following the World Gold Council’s announcement of a fall in the third quarter, the high cost of gold for Chinese consumers may further restrain demand in the fourth quarter.

According to the council’s most recent Gold Demand Trends report, China’s demand for jewellery was 153.7 metric tonnes in the third quarter, 6% less than the 163.2 metric tonnes in the same period previous year.

The council believes that this was actually a rather good result, citing the third quarter’s record high in yuan terms.

The key question, though, is whether Chinese consumers are willing to keep purchasing gold in spite of the high costs; decreasing premiums and fewer imports from Hong Kong point to growing reluctance.

The same is true for India, where the council reports a 7% growth to 155.7 metric tonnes from 146.2 in the same time in 2022, despite the country likewise experiencing a respectable demand for jewellery in the third quarter.

It is noteworthy, however, that the third quarter rise coincided with a decline in domestic prices, which had been declining since May until early October.

The current quarter’s demand increase in India is probably going to be curtailed by the recent price surge.

All things considered, when the three main demand factors are cooperating, gold tends to appreciate steadily.

These include purchases of investment goods, as evidenced by the increase in gold exchange-traded funds (ETFs); purchases made by central banks; and, lastly, purchases of jewellery, bars, and coins.

Although they have increased recently, ETF inflows are still far below their 2023 highs.

The third quarter saw substantial central bank purchases, with 337 metric tonnes recorded by the council—the second-highest third quarter ever.

However, there are indications that rising costs are impeding demand expansion in China and India, two important countries, negating the positive factors.

This does not imply that gold cannot rise higher; rather, it may not be as sure a bet as the anticipated conclusion of monetary tightening in western countries suggests.

(Adapted from Reuters.com)

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