Gold bugs rush in as low prices fuel trade

Brisk business on metals exchanges as buyers seek bargains amid hopes gold will rebound following inflationary central bank stimulus

PUBLISHED : Tuesday, 23 April, 2013, 12:00am
UPDATED : Tuesday, 23 April, 2013, 4:45am

Gold volumes for the benchmark cash contract on the Shanghai Gold Exchange, China's largest spot bullion market, have climbed to a record as lower prices lured buyers.

The volume for bullion of 99.99 per cent purity exceeded 43 tonnes for the first time and topped the previous peak, reached on Friday, of 30.44 tonnes, according to exchange data.

Prices gained as much as 1.7 per cent to reach a one-week high of 290.40 yuan (HK$361) a gram.

Gold prices in Shanghai tumbled 12 per cent on April 15 and 16, tracking a slump on international bullion markets.

"China's physical gold demand [was] tremendous after prices fell, so physical gold dealers and jewellery makers have had to replenish their inventory following robust sales," said Song Heping, assistant manager at Xiamen City Commercial Bank.

Meanwhile, hedge funds increased bets on gold rallying after prices plunged the most in 33 years, underscoring US billionaire John Paulson's view that bullion will rebound.

Fund managers and other speculators increased their net long positions in gold by 9.8 per cent to 61,579 futures and options in the week to last Tuesday, US Commodity Futures Trading Commission figures show.

"Given the price action, this rise in holdings was pretty surprising," said Dan Denbow, a fund manager at the USAA Precious Metals & Minerals Fund in Texas.

"People may have been looking to get back into the market and are taking advantage of the price to do so. There are people who still have a long-term belief in it. Physical buyers have also stepped up."

Investors also turned bullish on silver for the first time in three weeks.

Official-sector purchases and demand in Asia will support gold, Paulson & Co said in a letter to clients last week, joining BlackRock, the world's biggest money manager, in predicting a rebound.

Central bank stimulus will "eventually lead to inflation", Paulson & Co said in the letter, reiterating a bullish outlook for bullion.

The hedge fund is the biggest shareholder in the SPDR Gold Trust, the largest exchange-traded fund backed by the metal.

The US Mint's sales of American Eagle gold coins surged eightfold this month from a year earlier.

While the net long position in gold climbed last week, most of the gain was attributable to a retreat in short holdings, which may reflect short traders taking profits.

Short positions narrowed 8.2 per cent to 59,742 contracts, and longs gained 0.1 per cent to 121,321. Short holdings reached a record 70,126 in the week to March 12, and are still more than triple the average since 2006.