Gold price hits 6-week high as hedge funds run for cover

Image by Saxo Bank

Large scale speculators in gold futures are scrambling to cover massive short positions – bets that prices will fall – as the price of gold continues to recover from near four-year lows hit last month.

On Monday gold for delivery in June – the most active futures contract – leaped $23.30 or nearly 2% from Thursday's closing price hitting $1,224.20 during lunchtime trade in New York before settling at $1,218.60, a six-week high.

Gold has now rallied some 6% from its 2015 low of $1,148.20 an ounce hit mid-March but is still well below highs above $1,300 reached in January.

Today's strength is on the back of disappointing economic data released on Friday when markets were closed when the US Labor Department reported that the world's largest economy added just 126,000 new jobs in March against expectations of a 245,000 gain and the smallest increase since December 2013.

The turnaround came after eight straight weeks of increasingly bearish positioning to levels last seen December 2013

The news strengthens the hands of Federal Reserve doves – including chair Janet Yellen – who believe any rise in interest rates should happen later rather than sooner so that the labour market could recover fully. The gold price and interest rates have a strong negative correlation. As the metal produces no income, the opportunity costs of holding gold rises in a high-yield environment.

After eight straight weeks of increasingly bearish positioning on the gold market to levels last seen December 2013, large investors like hedge funds or so-called "managed money" last week added 44% to net longs – bets that price will rise.

In the week to March 31 according to the Commodity Futures Trading Commission's weekly Commitment of Traders data, hedge funds slashed short positions by a fifth and at the same time added to long positions in gold.

Silver futures also trended stronger on Monday with May contracts jumping 1.5% to exchange hands at $17.60 an ounce at the close. Like gold, silver went off to the races at the start of the year to hit a 2015 high of $18.36 on January 22 before falling back.

Silver positioning also turned bullish last week with speculators reducing short positions by 25% and adding to longs for a net long position of nearly 150 million ounces.

Like the price of silver, speculation in silver futures tend to be volatile. Hedge funds had to cover a net short position of 53 million ounces in October last year after pushing longs to a record of 234 million ounces only three months earlier.

Sourced :- Frik Els of MINING.com

Report: 2016 is start of new gold bull cycle

Disappointing jobs and manufacturing data out of the US coupled with a sagging dollar sent the gold price on a tear Wednesday with the metal surging past the psychologically important $1,200 an ounce level and back into positive territory for the year.

A new report by Metals Focus – Gold Focus 2015 – forecasts a bottom in the price of gold this year with a rising trend in 2016 after three years of declines.

Short term the London-based research firm expects further price weakness in the coming months and a low for the year at $1,080 which would constitute a more than 5-year low. Metals Focus' estimated annual average of $1,190 would mark a 6% decline compared to last year.

The actual start of US interest rate increases will – paradoxically – mark the turning pointing

"The biggest headwind continues to be expectations of US interest rate increases later this year, as other developed economies’ ultra-loose monetary policies (notably the Eurozone’s) remain in place, this helping to drive
up the dollar against other currencies. Low inflation, weak commodity prices and strong equities are other factors that should keep gold under pressure," says Metals Focus in its 88-page review.

The firm also believes that the actual start of US interest rate increases will – paradoxically – temper the pressure that expectations of a rise had placed on the price and mark the turning pointing.

Shortly after the  first Fed action in six years gold will start appreciating according to the report which is "premised on our expectation that these increases will be slow and modest, leaving real rates in negative territory for some time to come."

From 2016 onwards, there are several plausible arguments to be made to provide the spark for a renewed gold bull market according to the report:

While Western investor interest in gold remains low, selling pressure is likely to ease further from the already much-reduced level of liquidations seen in 2014.

Meanwhile, Asian investment demand for physical gold is expected to recover from last year’s slump. In addition potentially gold-friendly developments in debt, inflation, foreign exchange, commodity and equity markets and the scope for a far more malign environment for international relations should also boost the price.

Sourced :- Frik Els of MINING.com

Gold price leaps past $1,200 on safe haven buying

Amid nervousness on US bond and equity markets which are back in negative territory for the year and a spike in oil prices sparked by chaos in the Middle East gold leaped past the psychologically important $1,200 an ounce level on Thursday.

Gold for delivery in June – the most active futures contract – gained $21.76 or 1.8% hitting a high of $1,219.76 early on, before pulling back in early afternoon trade in New York to around $1,206 an ounce, still a three-week high.

The gold price is up more than 6% after dropping to a 2015 low of $1,148.20 an ounce last week and has now retraced almost 40% of its losses since the 2015 high above $1,300 reached in January.

Nervous investors piled into gold following a second day of sharp gains for the oil price to above $50 a barrel after top producer Saudi-Arabia launched airstrikes in Yemen against Iranian-backed militias that have taken over large swathes of the country.

With Egypt being drawn into the conflict on the Arabian Peninsula, the prospects for another protracted ground war in the region becomes more likely.

Gold also received support from a weaker dollar in early trade, but the greenback reversed course later in the day to within shouting distance of fresh 12-year highs. Gold and the dollar usually move in opposite directions.

The US Dollar Index is up 21% compared to this time last year and the past year has been the greenback's strongest run on a rolling 12-month period since 1973.

A new report by the World Gold Council that examines the complex relationship between the gold price and the world's reserve currency showed gold prices rise twice as much during weak dollar periods than they fall when the dollar strengthens.

Given that many analysts believe the dollar rally may be entering the final stretch, gyrations in the value of the currency could set up the gold price for a period of substantial upside.

Gold Spikes On Sudden $1.2 Billion Bid

For no good reason aside from the algos had their fun to the downside and crude ran its stops, precious metals' futures have suddenly exploded higher on heavy volume... The surge in gold saw approximately $1.2 billion notional traded...

These are the most bullish gold price charts you'll see today

Amid a fresh sell-off on US equity markets (third down week in a row) and another crude oil rout (down 9.6% for the week), gold managed a small gain on Friday with April futures finding a thin cushion against the crucial $1,150 an ounce level.

Gold's resilience is all the more remarkable since it's been into the teeth of a rabid dollar. Gold historically has inverse relationship to the value of the USD and on Friday the greenback jumped back above the 100-mark against the world's major currencies to the highest since early 2003.

That compares to a record low of 71.6 in April of 2008 and a record high of 164.72 in February 1985 when the price of gold bottomed at $284.25 an ounce. The first chart from a new research note by Julian Jessop, Head of Commodities Research Capital Economics, shows just how big a gap has opened up between the dollar and the gold price.

While the two do diverge from time to time (look at the pattern at the height of the global financial crisis) all things being equal you could expect gold to be trading closer to $400 an ounce at the moment. That supplies plenty of upside for gold once the dollar retreats from its lofty heights, which eventually it will.

An even closer negative correlation exists between the gold price and US inflation-adjusted interest rates (Treasury Inflation Protected Securities or TIPS).

Some analysts go so far as to say that the correlation is so strong that the gold price can be used as a predictor of interest rates, serving as an early warning system of both the direction and magnitude of the move in rates.

The underlying reason for the relationship is that as US yields rise – as is widely expected – the opportunity costs of holding gold increases because the metal is not income producing. The expectations of higher rates in the US is also a major factor behind the surging dollar.

Taking chart number two at face value, the eventual return of US real yields to more normal levels of around 2% would be consistent with the gold price falling back below $1,000 per ounce. But real yields have remained stubbornly low and the second chart would suggest gold should be scaling $1,400 right now.

A level which Capital Economics predicts we'll reach by the end of the year.

BNP: Gold price will average in triple digits next year

On Thursday gold for delivery in April managed to eke out a slight gain to close at $1,151.90, up $1.30 from a four-month low hit yesterday.

That gold has managed to stay above the crucial $1,150 an ounce support level is a relief to gold bulls. The metal closed below this level early November, but soon bounced back.

For a sustained period of sub-$1,150 gold you have to go back to April 8, 2010.

Gold's resilience is the all the more remarkable since it came into the teeth of a rabid dollar. Gold historically has inverse relationship to the value of the USD.

Overnight the greenback surged above the 100-mark against the world major currencies for the first time since April 2003, before retreating just below triple digits during normal trading in New York.

The last time gold was beaten back for such a stretch of time was January 1998

That compares to a record low of 71.6 in April of 2008 and a record high of 164.72 in February 1985 when the price of gold bottomed at $284.25 an ounce.

The strong dollar coupled with rising interest rates in the US which raises the opportunity costs of holding gold as the metal produces no income, are high on the list of reasons analysts are calling for further weakness in gold.

France-based bullion bank BNP Paribas released forecasts for average prices this year and next that sees gold sliding back into triple digit territory for the first time since September 2009.

Platts News reports BNP sees a 2015 average of $1,160/oz and $975/oz in 2016 according to a research note on Thursday:

"Future policy action by the US Federal Reserve remains high on gold's agenda. It will continue to dictate the pace at which the dollar appreciates (and official sector demand for gold declines) and accordingly how much downward pressure will be exerted on gold," BNP analysts Harry Tchilinguirian and Stephen Briggs said.

The only near-term positive the pair predicted is that any hike in interest rates in the US could be put on hold for the time being, or postponed until later in 2015.

"On the physical side … further strength in the dollar stands in the way of import demand in [certain] key consuming countries, such as Turkey and India," the analysts said.

The spot price of gold in New York, which does not trade in nearly the volumes of the most active futures contract, is suffering its worse streak losing streak in 17 years.

According to Bloomberg it was the ninth straight session of losses with gold for immediate delivery falling slightly to settle at $1,153.73 on Thursday. The last time gold was beaten back for such a stretch of time was January 1998.

Almighty dollar is pushing gold price near 5-year low

On Tuesday the gold price came under renewed pressure with April futures falling just over 1% to $1,153.80, a more than four-month low.

$1,150 an ounce is a crucial support level for the gold price – the metal has closed below this level on only two trading days since April 8, 2010.

The last time the dollar crossed the 100-mark was December 2002, when gold was trading at $347 an ounce

Those sessions were November 5 and 6 last year before an unusual decoupling between the gold price and the US dollar occurred.

All things being equal, commodities priced in US dollars have an inverse relationship to the world's reserve currency.

But after bouncing back from its November low gold started to appreciate even as the greenback continued its upward march.

On Tuesday, the USD hit a fresh 13-year high against the currencies of major US trading partners, with the dollar index reaching 98.7, up more than 22% in a year.

At the same time it appears that the historic negative correlation between the dollar and the gold price is once again in place.

And as this graph from Saxo Bank suggests it could spell further downside for gold as few expect a let up in dollar strength any time soon:

Vale Reports Annual Production Records in Copper, Gold, and Highest In Nickel Output

Vale S.A. (Vale) achieved several production records, and also reduced capital expenditures by another $2.254 billion in 2014, the company said in its performance report. 

In 2014, its output of iron ore , copper and gold was 331.6 million tonnes, 379,700 tonnes and 321,000 oz, respectively, all annual production records. 

Over the year, the company also reported the highest annual production in nickel since 2008, producing 275,000 tonnes, according to its report.  

The company also registered record sales volumes of iron ore and pellets (313.6 million tonnes) and gold (351,000 oz), and the highest sales volume of nickel (272,000 tonnes) since 2008, it noted. 

In 2014, the company also completed eight capital projects, negotiated a key partnership for our coal operation in Mozambique and still paid $ 4.2 billion in dividends while preserving a healthy capital structure.

Custom Duty on Gold will be Reduced From 10% to 6% Likely on Budget Day.

The government is likely to announce a reduction in the customs duty on gold and the setting up of special notified zones for gems and jewelry in the budget.

The customs duty on gold is likely to be brought down to 6 per cent from 10 per cent in the wake of a significant decline in the import of the yellow metal.

The setting up of notified zones will boost the manufacturing of gems and jewellery, which is one of the sectors identified in the "Make in India" programme of the Narendra Modi-government.

"Gold imports are declining continuously. The gems and jewellery sector contributes significantly to the country's total exports. On account of this, we are expecting a cut in the import duty," commerce ministry officials said.

Gold imports in December declined to 39 tonnes from 152 tonnes in the previous month. The export of gems and jewellery has fallen 3.73 per cent year-on-year to $3 billion in January.

"The low duty will curb the smuggling of precious metals, increase affordability of gold jewellery in the domestic market and enhance the cost-competitiveness of gold jewellery manufacturers in the export market," analysts said.

The gems and jewellery sector, which employs about 3.5 million people, accounted for almost 13 per cent of exports in 2013-14.

The sector is one of the 25 areas identified under the "'Make in India" programme, which aims at attracting domestic and foreign investments to boost manufacturing and create jobs.

The notified zones would also import and trade in rough diamonds.

"The mining companies will be taxed to the extent of invoices raised to Indian companies, eliminating middlemen involved in the trade. This will help India to become a rough diamond trading hub, and especially help small diamond polishing units in India," CARE Ratings said in a research note.

Simultaneously, the government may hike the import duty on gold and silver jewellery to boost local manufacturing.

Officials indicated that the Centre could hike the duty on gold jewellery to 20 per cent and silver jewellery to 25 per cent from 15 per cent. The move will protect the interest of small artisans and provide an incentive to the local manufacturers of jewellery.

In the run-up to the elections, the BJP had promised to ease restrictions on gold imports as the curbs had led to smuggling. Modi had said any action on gold should take into account the interest of the public and traders and not just economics and policy.

India Lifts Ban On Bank Gold Imports: Gold Can Again Be Used As Loan Collateral

One week ago we reported that central bank purchases of gold in 2014 were the second highest in the past 50 years, driven by purchases out of Iraq, Kazakhstan and - most of all - Russia, with no offsetting selling. But what about other more conventional sources of demand? Take jewelry, which while very strong in the beginning of the century, dropped off after the Great Financial Crisis, and then tumbled again after India imposed numerous restrictions on gold imports, which however merely forced the local population to find novel ways of smuggling gold into the country.

This is what the WGC had to say about gold jewelry demand in 2014.

Having suffered weak year-on-year comparisons for much of 2014, jewellery demand rallied to a strong finish, reaching 575t in the fourth quarter – 1% higher than Q4 2013. The sector was buoyed by good festival- and wedding-related demand in India, as well as by the seasonal holiday effect in the US and UK. Global annual jewellery demand of 2,152.9t, although down 10% year-on-year, was above the five-year average by a comfortable 5% margin. 2014 was a standout year for Indian jewellery. Demand reached a record 662.1t, topping the previous year’s total by 8%. This in spite of government measures designed to restrict gold imports being in place for much of the year. Wedding- and festival-related purchases drove robust demand of 179.1t in the fourth quarter, up 19% over Q4 2013. Indeed, the second half of the year was the strongest H2 in our data series (from 2000), up 37% on H2 2013.

US jewellery demand was again notable for its improving trend: Q4 was the seventh consecutive quarter of year-on-year growth and the strongest fourth quarter since 2009. Similarly, 2014 full year demand of 132.4t was the highest for five years. That being said, it clearly has to be acknowledged that the market remains far  below pre-crisis levels of jewellery demand, which between 2000 and 2006 averaged 360t per year.

In considering jewellery demand, it is interesting to look at the contribution that the sector has made over recent years to the accumulation of above-ground stocks. Jewellery is by far the largest component of above-ground stocks of gold – accounting for almost half of the 177,200t of gold estimated to be held by private owners and central banks. Jewellery consumption less recycling provides a fairly good proxy for net demand (as the vast majority of recycled gold will be old jewellery). In years gone by net jewellery demand regularly added as much as 2,000-2,500t per year to above-ground stocks. This plunged to less than 100t during the depths of the global financial crisis as distress selling of gold skyrocketed in tandem with a slump in jewellery demand.

The last two years have seen net jewellery demand recover to exceed 1,000t. This is partly due to a firming of jewellery demand as the world has emerged from the crisis. But by far the greater impact comes from the recycling sector and the sharp reduction in the volumes of gold being sold back onto the market. Above-ground stocks of jewellery should continue accumulating at a similar rate as we expect recycling to remain low in 2015, counterbalancing the recent growth in  mine production.

In short, even with extended draconian measures created by India to prevent capital account outflows as a result of uncontrolled gold imports (which still take place only "under the table"), a whopping 1000 tons of gold ended up in the form of gold trinkets in 2014 mostly in India, and to a lesser extend in China.

All of that is about to change: earlier today India's Economic Times reported that the RBI, surely facilitated by the drop in oil prices - a key import for India - has finally lifted its ban on imports of gold coins and medallions by banks and trading houses.  The RBI in a notification also said banks are permitted to import gold on consignment basis. Domestic sales will be, however, permitted against upfront payment only.

"While the import of gold coins and medallions will no longer be prohibited, pending further review, the restrictions on banks in selling gold coins and medallions are not being removed," it said.

The RBI and the government have been receiving requests for clarification on some of operational aspects of guidelines. Aiming to tame the then widening current account deficit (CAD), the central bank in August 2013 had prohibited imports of gold coins and medallions besides restricting inbound shipments of the metal.

Under the 80:20 scheme, which was withdrawn on November 28 last year, gold imports were linked with its exports.

The notification further said the obligation to export under the scheme will continue to apply in respect of unutilised gold imported before November 28, 2014.

"Banks are free to grant gold metal loans," it said, adding that Star and Premier Trading Houses (STH/PTH) can import the metal as per entitlement without any end use restrictions.

And it's not just jewelry: per the RBI announcement:

"Nominated banks are now permitted to import gold on consignment basis. All sale of gold domestically will, however, be against upfront payments. Banks are free to grant gold metal loans."

Why is that important? Because as we wrote in January 2013 in "Don't Show Bernanke This Chart Of Gold Loans In India", before the import ban, gold in India was most certainly money, and the amount of gold loans being created in India was simply exponential.

 However, since the importing of gold and its reuse as a money-equivalent collateral meant even more undesired capital outflows, the RBI was forced to halt the practice. Until now.

What all of the above simply means is that the government, tired of fighting a losing war with gold smugglers, has opened up one more avenue by which gold can enter the country on an official, and taxable basis, and as a result physical gold will now resume flowing into India officially, a process which depending on how much gold is being mind out of the ground could mean a rapid depletion of the net available gold in any one period. 

It also means that going forward, India's true gold demand will finally be on the books, as banks find numerous loopholes to pass on the imported gold to end consumers - either in physical or loan form - only this time with the total tonnage once again being officially represented, as was the case in previous years.

By way of example, gold imports surged by 8.13% Y/Y to $1.55 billion in January after the initial RBI restrictions were eased. Expect this number to spike that much more in the coming months as banks rush to reload on physical, especially with paper gold prices determined mostly by ETFs and manipulated by central banks, continue to make purchases (in most currencies, and certainly the dollar) increasingly more attractive, just as the CEO of Rosneft explained is happening to oil right now.

Finally, for those who are unaware, India is considered the largest importer of gold - a title it shares on again, off again with China, the bulk of whose gold imports are also undocumented as they end up almost exclusively in some bonded warehouse where the gold is used as (infinitely) rehypothecated collateral for Commodity Funding Deals and/or in the vault of the PBOC.

The price of gold is taking a beating

Gold's 2015 rally was looking shaky on Wednesday with the metal falling for a second day in a row to levels last seen January 9.

The decline in the gold price came despite rising concerns that Greece may abandon the euro and Ukraine may be headed for a wider conflict with the stronger US dollar doing most of the damage.

In afternoon trade on the Comex division of the New York Mercantile Exchange gold for April delivery dropped 1.1% or $13.60 to exchange hands at $1,218.60 an ounce, at the lows for the day.

Gold's 2015 gains on the back of safe haven demand have now been trimmed to around $30 an ounce as the metal beat a steady retreat from a high of $1,307 hit on January 22.

Yields on benchmark US treasurys stayed on the higher side of 2% on Wednesday, rising for the sixth straight session to a one month high.

It's an indication that markets are expecting a rate hike by the US Federal Reserve over the summer months. Higher yields raises the opportunity costs of holding gold because the metal provides no income.

Higher rates also boost the value of the US dollar – already trading at multi-year highs – which usually move in the opposite direction of the gold price.

On Wednesday the US currency edged higher again coming close 12-year highs against the currencies of its major trading partners hit late January. The dollar index has strengthened by 17.4% over the last year.

Germany's Commerzbank on Wednesday predicted a gold price of $1,250 an ounce by the end of the year reports Platts News.

The bank said that while it believes that the gold price is likely to continue benefiting from the "ultra-loose monetary policy pursued by the ECB, we expect the gold price to suffer a renewed setback in the summer months because the market is underestimating the [US Federal Reserve's] interest rate hikes."

In Europe, Wednesday's crucial meeting of European finance ministers to discuss the future of the Greek bailout program may offer a surprise to markets, while the outcome of urgent peace talks between Russian and Ukraine happening at the same time is also being closely watched.

Gold investors 'putting aside fundamentals'

Gold price weakness returned on Tuesday as improving prospects of a Greek debt deal dampens safe haven buying and a rise in bond yields in the US make the metal less attractive as an investment.

In afternoon trade on the Comex division of the New York Mercantile Exchange gold for April delivery shed 0.7% or $8.90 to exchange hands at $1,232.60 an ounce, not far off its lows for the day.

Gold's 2015 gains – the metal is still up nearly 4% or over $48 since the start of the year – have been ascribed to safe haven buying amid the West-Russian standoff over Ukraine, a slowing global economy and a debt crisis in the Eurozone.

A stronger than expected jobs report in the US on Friday provided a boost to equities and caused a bounce in bond yields, with benchmark US treasurys on Tuesday scaling 2% for the first time in a month. Higher yields raises the opportunity costs of holding gold because the metal provides no income.

Higher rates also boost the value of the dollar – already trading at multi-year highs – which usually move in the opposite direction of the gold price.

India and China are not buying right now, our books are not full

On Tuesday the greenback edged higher staying in range of 12-year highs against the currencies of major US trading partners hit late January. The dollar index has strengthened by more than 17% over the last year.

Platts quotes the CEO of MKS Frederic Panizzuti as saying that concern about global risks is the main driver of the gold price:

"We have put fundamentals aside in our gold outlook for 2015," Panizzuti said. "Geopolitics, the perception of risk and even emotional risk from investors are the main drivers this year."

Swiss-based MKS is one of the world's largest refiners and Panizzuti said this year's rise in the gold prize has been largely Exchange Traded Funds investing in the precious metal rather than physical demand that has driven the market:

"India and China are not buying right now, our books are not full. But we expect to see some buying from March and April onwards."

Panizzuti was the winner in 2014 of the London Bullion Market Association's gold forecasting contest with his estimate of $1,262 per ounce for the year with the actual average over the 12 months of $1,267.

For this year Panizutti is the second most bullish of the 35 analysts with an annual average prediction of $1,292 per ounce and a range of $1,150 and $1,390.

Overall the LBMA survey indicates gold will trade in a narrow band this year to average $1,211 a troy ounce with a range between $1,085 and $1,356 during 2015.

Gold, knocked lower by strong U.S. jobs data

* U.S. nonfarm payrolls increase 257,000 in January

* Dollar boosted by higher U.S. Treasury yields

* China 2014 gold consumption fell by a quarter 

(Reuters) - Gold fell more than 2 percent on Friday as global stock markets and the dollar rose on stronger-than-expected U.S. jobs data, raising expectations that the Federal Reserve will increase interest rates by midyear.

U.S. nonfarm payrolls increased by 257,000 last month, topping expectations for 234,000, with the unemployment rate ticking up to 5.7 percent due to more people entering the labor force.

"The U.S. employment report was good and there has been quite a sharp adjustment in interest rates expectations, with 10-year Treasury yields up 10 basis points," ABN Amro analyst Georgette Boele said.

"I expect lower precious metals prices for the next six months up to the moment the U.S. really starts hiking interest rates."

Spot gold dropped to a three-week low of $1,228.25 an ounce earlier and was down 2.4 percent at $1,234.70 an ounce by 2:02 p.m. EST (1902 GMT), its biggest fall since Dec. 15. It has lost 3.8 percent so far this week, which would be its largest fall since the week ended Oct. 31. 

U.S. gold for April delivery fell 2.2 percent to settle at $1,234.60 an ounce.

"If nothing else changes, earlier hikes in interest rates by the U.S. central bank would be likely to undermine the prices of precious metals, notably gold and silver," Capital Economics said in a note.

"If Fed tightening is gradual and interest rates remain low by past standards, as we expect, there would be plenty of scope for other, more positive factors to dominate."

The dollar rose 1.2 percent against a basket of leading currencies, helped by a rise in the benchmark 10-year U.S. Treasury yield to more than 1.9 percent. Wall Street rose and European equities hit a seven-year high.

"The negative pulls for gold are the elevated speculative positions, hawkish Fed and stronger dollar, while the lowering of the reserve requirements in China, negative yields in most European countries and uncertainty in Greece lend support," Saxo Bank senior manager Ole Hansen said.

Elsewhere, holdings at SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, rose on Thursday to 24.86 million ounces, the highest since September.

China's gold consumption fell 24.7 percent to 886 tonnes last year even as output from the world's top consumer climbed 5.5 percent, the China Gold Association said.

Spot silver slid 3.7 percent to $16.62 an ounce. Platinum was down 2.6 percent at $1,218.

India reclaims top spot as No. 1 gold consumer

India is back to being the number one consumer of gold, knocking China off the top of the podium as the country that consumed the most bullion in the form of gold bars, coins and jewelry, in 2014.

The latest update of the annual study by GFMS of world gold supply and demand found that sliding demand from China – which grabbed the top gold consumer mantle from India in 2011 – is behind the shift.

The report by GFMS analysts at Thomson Reuters showed that Chinese gold demand dropped by over a third to a four-year low of 866 tonnes, while scrap gold supply rose to a new high of 182 tonnes.

Slower economic growth and a crackdown on corruption conspired to cut Chinese jewelry demand to 608 tonnes, a full 33 percent below levels seen in 2013, the report said. Demand for gold bars fell 53 percent to 171 tonnes, a five-year low. An overhang of gold in the Chinese market during the voracious buying that occurred in 2013 was also a factor in keeping purchases subdued, according to GFMS.

Some analysts, however, question whether the numbers in the GFMS report tell the whole story.

Mineweb's Lawrence Williams noted that data from the USGS shows 32 percent of US gold exports in October went to Mainland China rather than through Hong Kong, the normal entrepot for bullion destined for China. Other export flows, especially from Switzerland, are going direct to the mainland. "[O]verall this suggest that Chinese consumption may be considerably higher than the GFMS report appears to suggest," Williams writes.

Meanwhile in India, jewelry demand in 2014 rocketed up 14 percent, to a record 690 tonnes, placing the country ahead of China as the world's top consumer of gold jewelry.

That trend was first noticed back in November when Indians bought 39 percent more gold in the run-up to Diwali and the start of the traditional wedding season.

A weakening of gold prices in rupee terms last year also boosted gold demand in India, along with confidence in the new government led by Narendra Modi, according to a World Gold Council report released mid-November. The country has also witnessed a significant increase of gold smuggling since the government ratcheted up restrictions and taxes on legitimate imports of the precious metal.

Other key findings of the GFMS report:

• the gold market is currently in surplus, a situation that is expected to continue due to further liquidations from gold ETFs.
• gold mine production rose last year by 2 percent, to a record 3,109 tonnes. However GFMS does not anticipate production to increase much this year, with most large gold mines now on stream.
• mining companies are returning to net gold hedging, which was around 42 tonnes in 2014.
• GFMS sees the gold price averaging $1,125 an ounce in the second quarter, rising to $1,160 in the second half.

Will India’s gold imports surge on tariff cuts? – Jayant Bhandari

India is the world’s second-largest importer of gold,1 currently taking in around 800 tonnes per year.2 In India, gold trades at a premium to international prices because of the hefty import duties and high domestic demand.

Jayant Bhandari advises funds and institutional investors on investing in India, and has commented on India’s impact on world gold demand for Sprott’s Thoughts.

In his last contribution, he said that India’s demand for gold would not be threatened by the heavy import tariffs that the government imposed in 2013. Smuggling and bribery would undermine government measures, he said.

He was dead-on. The Financial Times reports:

“About 200 tonnes of gold was smuggled into India in 2013, according to the World Gold Council, while officials at Mumbai’s international airport have complained that smugglers have been inventing new methods to hide the contraband metal.”

Now the Indian government is reversing its efforts to curtail gold imports, and gold importers expect a drop in import tariffs to be announced in the upcoming federal budget.

Prices are coming down as a result – traders who hold gold inventories are dishoarding reserves in anticipation that import tariffs will be lower in the future, as Jayant explained in a recent note:

As a result of the expected tariff cut, gold is trading 10% higher than international prices compared to about 12% or 13% higher a month back. As the import tax is a high 11.3%, gold traded at a slight premium to the official price, but now it trades at a slight discount. The reason is that traders and jewelers are reducing their stocks — it makes no sense for them to be stuck with gold when the price is expected to come down.

But will there be a big surge of gold imports as a result of tariff cuts? Probably not, says Jayant:

Now, Western media outlets (CNBC, e.g.) are thinking that a reduction in the import duty will suddenly increase the availability and demand for gold.

Availability was never a problem. Gold continues to be a very liquid commodity in India, with almost no spread. I don't think that a few percentage points’ reduction in the price of gold will make a noticeable difference to demand. A tariff cut will not lead to suddenly higher imports from India.

Even so, gold imports will continue to be strong, says Jayant, because holding gold is a good alternative to owning Rupees, Indian stocks, and real-estate for most Indians:

I have been telling people in India to load up on gold, for three reasons.

The economy is not doing well. Foreign and Indian investors have been hoping for big infrastructural projects and a significant liberalization of the economy to occur under the new Prime Minister, Narednra Modi. But the present government has done almost nothing in that direction.

Modi is a darling of the public for now, so the market still believes he will eventually do a lot for the economy. Foreign investors are enamored of Modi for his lip service for a more free market system.

People are hoping that the next federal budget will be a magic wand, bringing adjustments that will put the economy on the growth path painlessly. The truth is that entrenched interests from his own party would never let this happen, even if this were what the Prime Minister really wanted.

India’s currency keeps falling. As of January 29, it is down 6% in US dollar terms since its high during Modi’s inauguration in May 2014. This comes despite massive help from cheaper oil, which is India's biggest import commodity. Lower oil prices have slashed India's import bill. But it hasn’t stopped the Rupee from going lower. This tells you how weak the Indian export economy really is.

People typically leave out currency devaluation when looking at stock market performance, leading them to think that the Indian stock market has done better than it has in real terms. Now, of course, it has done well, even when adjusted for the Rupee's devaluation, but in my view it is one of the most over-priced stock markets today. Remember that Indians don't have many possibilities for moving their money abroad. So they generally must invest in domestic stocks and properties.

India’s property market is extremely expensive. Your rental yield, around 3%,4 is much lower than the official interest rate of 7.75%.5 So investors are left to hope that property prices keep increasing unhindered by the reality of rents.

Based on these three reasons, I think the economy will continue to do badly and the stock and property markets will fall significantly going forward. When this happens, people will look to gold as a store of value. So in my view, gold is a good place to be if you live in India. I expect that demand will continue to be strong, although tariff changes are likely to have only a small effect.