Can Jewellery Demand Stop The Gold Rot?

Demand for gold jewellery features in the cut and thrust of the world’s gold markets, perhaps more than at assumed. Of note, Chinese consumers have bought a lot of gold jewellery in recent months. Were they seeking bargains in the expectation prices might go back up? Macquarie observes demand so far this year has been higher than last year and that has cushioned the significant drop in the gold price. Some of the increased demand may, more or less, be permanent but a slowing Chinese economy won’t help.
What is significant to Macquarie is the high level of Chinese yuan expenditure in gold jewellery. This has been underpinned by some factors which could be weakening. They include reduced Chinese GDP growth and, within that, private consumption growth. Macquarie has reduced the Chinese GDP growth forecasts to 7.9% and 7.5% respectively for 2013 and 2014, from 8.8% previously.
An important feature this year has been a rising market share of gold jewellery in Chinese retail sales, which have been up strongly across the economy in nominal yuan terms. The gold and silver jewellery percentage of retail sales rose to a high of 1.7% in April. One reason has been new store openings and other changes at the retail level. Such changes should entrench some of the gains. Where the increase in market share of retail sales has been the result of the falling price of gold, anticipatory buying and bargain hunting may evaporate when the price turns higher. Indeed, Macquarie observes the market share of gold and silver jewellery has eased back to 1.3% of total retail sales in May and June and, although this may be seasonal, it could be indicative.
China’s other uses for gold, as investment mainly, have increased even faster than jewellery. This tells us there is an underlying appetite for gold and, without it, gold’s price fall may have been more dramatic. Nevertheless, there may come a point where the jewellery market is saturated and the price will hit a point that pushes demand down. Standard Bank suspects US$1,300/oz may be the level. The precious metal is edging back to US$1,300/oz but it could encounter resistance here.
Source:Bullion Bulletin

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