Western investors boost gold prices but it loses shine in Asia

London

WESTERN investors and speculators have boosted gold prices to 12-month highs of over US$1,700 an ounce. The jewellery trade in India, China and Japan, however, has slumped.

Illustrating the extent of investment and speculation, the net assets of gold-backed exchange traded funds (ETFs) soared by 298 tonnes in the first quarter of the year to a record 3,185 tonnes worth US$176 billion at current prices.

According to the World Gold Council (WGC), a mine producer research and lobby organisation, gold ETFs increased by 659 tonnes over the past year. The main ETFs are SPDR Gold, Invesco Physical and Ishares.

Most buying has taken place in the US and Europe but there are a few small gold ETFs in Japan and other parts of Asia.

Besides the ETF purchases there has been considerable speculation on the US futures and options exchange.

As at April 24, returns of the US Commodity Futures Trading Commission show that hedge and commodity trading funds held net long contracts equivalent to 556 tonnes.

Including holdings of smaller investors and speculators the total net bull position amounted to 861 tonnes, which is lower than the recent peak

The total ETF and net long derivatives position position of 4,046 tonnes dwarf jewellery demand which has tumbled by 338 tonnes to 1,911 tonnes in the 12 months ended March 2020, the WGC said on Thursday.

"First-quarter jewellery demand fell by 39 per cent to 325.6 tonnes - the lowest on record," said Andrew Naylor, the head of the WGC's Asean and public policy division.

Demand in China, the biggest jewellery consumer, fell by 65 per cent year-on-year to 64 tonnes. India, the next biggest jewellery centre, experienced a fall of 41 per cent to 73.9 tonnes in the first quarter.

Mr Naylor said, however, that jewellery shops and manufacturers have recently opened again in China.

The WGC covers five Asean nations - notably Indonesia, Malaysia, Singapore, Thailand and Vietnam - as the others do not have transparent statistics, said Mr Naylor.

Asian and sub-continent nations traditionally hoard gold. Total gold bar and coin sales tumbled by 233 tonnes to 855.2 tonnes in the past 12 months, said the WGC.

In the first quarter of 2020, central banks bought 145 tonnes, down by 8 per cent year-on-year.

Due to the oil and gas price collapse, as well as the Covid-19 pandemic, the Russian economy is under extreme pressure and this has forced its central bank to stop purchasing gold at current high prices.

The WGC continues to claim that gold is being bought for safe haven reasons. Some investors, who have placed gold in bullion vaults for the long term, have purchased the metal to hedge against geopolitical uncertainty such as the coronavirus virus pandemic and currency devaluation, as well as against inflation.

The volatility in the market, however, illustrates that this safe haven status has been tainted.

Much of the recent speculation and ETF demand have been based on the upward momentum on the charts and hence bullish sentiment, according to traders.

Hedge funds and other players are trading gold within ranges and are issuing bullish recommendations. Despite that, the price is still 10 per cent below its all-time high of more than US$1,900 in 2011.