LAUNCESTON, Australia (Reuters) - Gold’s impressive rally from May to the start of September has since stalled, even though the drivers of geopolitical tensions and positive investor sentiment remain in place.
What has gone missing is physical demand from the world’s two biggest buyers, China and India, and it’s likely that gold will battle to mount a renewed rally until this source of support returns.
The spot gold price XAU= rallied 23% from a low of $1,265.85 an ounce on May 2 to a high of $1,557 on Sept. 4 as investors flocked to exchange traded funds (ETFs) amid the ongoing trade dispute between the United States and China, heightened tensions in the Middle East and emerging signs of slower global economic growth.
But since reaching a six-year high, the precious metal has meandered sideways, trading in a narrow range between $1,458 an ounce and $1,535, ending at $1,509.24 on Monday.
A lack of appetite among Chinese and Indian buyers, facing multi-year high prices in local currency terms, is the most likely candidate for gold failing to extend its rally.
Refinitiv GFMS said in its quarterly report on Monday that jewellery demand in the third quarter fell 28% from the same period a year earlier to 317 tonnes, the lowest total in the database, which goes back to 2000.
Retail investment demand was also soft, dropping 25% to 203 tonnes in the third quarter, Refinitiv GFMS said. This was the weakest outcome since the first quarter of 2009.
The lack of interest in jewellery, bars and coins was offset by a 247 tonne jump in net ETF inflows, continuing a strong trend since the start of the year.
Refinitiv GFMS said ETF holdings at the end of September were up 21% year-on-year and “just shy” of the record levels from 2012.
However, it also appears that flows into ETFs have stalled. Holdings in the largest fund, the SPDR Gold Trust HLDSPDRGT=XAU, have been largely steady since the end of September, when they were at 29.67 million ounces, to the close on Monday at 29.41 million ounces.
A further worrying sign for gold is that India’s demand appears to be under pressure, with imports dropping a third to 38 tonnes in October from 57 tonnes in the same month in 2018, Reuters reported on Monday, citing a government source.
The October decline marks the fourth straight month of lower imports in the world’s second-largest gold consumer, with higher prices being blamed for crimping demand.
China, the world’s top gold consumer, is also importing less gold, with data from Hong Kong, the main conduit for imports to the mainland, showing a 9% drop in September from August.
China does not provide trade data on gold and the Hong Kong data may not provide a complete picture of Chinese purchases as gold is also imported via Shanghai and Beijing.
However, calculations based on data from the China Gold Association showed that third-quarter consumption was 244.8 tonnes, down 20.7% from a year earlier.
With soft demand in the top physical gold buyers and a loss of momentum among ETF investors, it’s hardly surprising that gold has struggled in recent weeks.
The possibility of even a watered down, or small-scale, trade deal between the United States and China is likely to act as a further headwind to gold.
But it’s still too early to write off gold, since there’s still every chance the trade detente unravels, given the volatile nature of U.S. President Donald Trump.
The geopolitical situation remains a bubbling pot in the background, capable of boiling over at any moment, and the global economy isn’t out of the woods as yet, factors that should at least keep gold on its current sideways path.
Editing by Richard Pullin
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