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New Asian Investors in Gold

After falling 0.42 percent last week, the U.S. Comex gold futures rebounded 0.81 percent while the Dollar Index fell 0.21 percent this week. Gold price recovered from a four-month low of $1,626.00 on 4 January, and ended at $1,662.20 on Tuesday. After a strong start last week, the S&P 500 index and the Euro Stoxx 50 index retreated 0.64 percent and 0.66 percent respectively.

The Japanese Investors
As Japan’s new Prime Minister Abe is determined to fight deflation and spur economic growth in Japan, he has renewed interests in gold as an asset class among the pension funds. On Tuesday, the World Gold Council’s Tokyo representative expected that the Japanese pension funds would likely double their investments in gold-backed ETPs to 100 billion Yen by 2015. Assets under management in Japanese pensions amount to $3.36 trillion, according to Towers Watson & Co. Currently, the top three pension funds in Japan, with assets of about $1.75 trillion, have hardly any allocation to gold, but have about 65 percent in Japanese bonds. If these three funds allocate just 1 percent to gold, this would be equivalent to about 300 tonnes of gold based on the current price of $1,660/oz. According to the GFMS, investors add on average 300 tonnes of gold per year since the end of 2004, which has led gold to jump about 18 percent per annum. The additional 300 tonnes of demand from Japan could lead gold to jump 18 percent from here.

Gold Price Drop Caused Physical Demand to Rise

The recent sharp drop in gold price has caused the Asian physical demand to pick up. On 7 January, the Shanghai Gold Exchange 99.99 percent purity gold contract’s trading volume jumped to a record high of 19,504.8kg. Chinese demand for gold generally rises before the Chinese New Year, which will begin on 9 February. According to the Hong Kong government, China imported 90.764 tonnes of gold in November, almost doubled from the 47.478 tonnes in October. Bloomberg calculated that during the first 11 months in 2012, gold shipments almost doubled from 392.564 tonnes a year ago to 720.091 tonnes.

Nevertheless, gold investors such as Marc Faber are warning that in the short-run, the strength of the U.S. dollar can cap the rise of gold price. He thinks gold can correct to between $1,550 and $1,600. Asian buyers are most likely to buy on dips again.

Kelly Smith
Sharps Pixley, London

09 Jan 2013 | Categories: Gold

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