Sole support from China for gold demand may not last
Slump in Indian consumption and absence of other drivers dash hopes for a rally in prices
The most frightening concept for a gold miner or trader currently would be to contemplate a world without China.
Global gold demand fell to the lowest in four years in the third quarter, according to the World Gold Council, and the 21 per cent drop from the same quarter last year would have been far worse if it was not for China.
China is set to overtake India as the top gold consumer this year, and is already ahead on a rolling four-quarter basis.
Demand in China rose to 209.6 tonnes in the third quarter from 177 tonnes last year, largely driven by a 29 per cent jump in jewellery demand.
In contrast, India's consumption slumped 32 per cent to 148.2 tonnes as the government's efforts to restrict imports became more effective.
The other drivers of gold demand also do not look encouraging for bulls, with investment demand down 56 per cent and central bank purchases falling 17 per cent in the third quarter.
The best that can be said is that outflows from exchange-traded funds were nowhere near as dramatic as those in the second quarter, with the council reporting net sales of 118.7 tonnes in the third quarter, down from 402.2 tonnes in the second.
Net purchases by central banks were 93.4 tonnes in the third quarter, up from 79.3 tonnes in the second. But their buying is likely to be well below the levels of the previous two years.
Assuming fourth-quarter buying matches the average so far this year, the total for the year will be about 400 tonnes, down from last year's 544 tonnes and 2011's 457 tonnes.
The message from the council report is that China is the sole bright spot for gold demand, and likely the best reason why prices have been largely stable after plunging almost 30 per cent in the first half to a three-year low of US$1,180.71 an ounce in June.
The question then becomes: what is the outlook for gold demand in China? Is the higher consumption sustainable or likely to stabilise or retreat?
China Gold Group, the country's largest producer, is not overly optimistic, with Du Haiqing, a vice-general manager, saying earlier this month that while gold consumption would climb above 1,000 tonnes this year, it would decline thereafter.
Gold demand received a boost this year from the slide in prices as largely Western investors exited exchange-traded funds, but Du said this was "abnormal" and Chinese buying would return to more usual patterns next year.
Even if Chinese demand remains at current levels, it will not be adding to growth next year, and thus at best be supportive of prices rather than being a bullish factor.
It also appears that Indian demand will not be making a comeback in the short to medium term, despite evidence that there is pent-up demand because of the government restrictions.
India has progressively raised the import tax on gold to 10 per cent and imposed a 20 per cent re-export requirement as part of its efforts to lower its current account deficit.
Gold has been second to crude oil on the South Asian nation's import bill, and unlike oil, it is not essential for the economy.
Physical premiums have risen in India, reaching US$120 an ounce above London prices this week, up from US$80 last week, according to the All India Gems and Jewellery Trade Federation.
Indian gold imports are also weakening despite the traditional wedding and festival season, which normally boosts demand.
About 23 tonnes of gold were imported last month, the Economic Times reported last week, citing traders.
With Indian imports curtailed and Chinese buying likely to ease after the Lunar New Year early next year, it is hard to see why gold prices should rally.
Certainly, the overall market does not buy into the fear story of indefinite monetary easing in the United States eventually resulting in uncontrolled inflation and bankrupt governments.
While the tapering of quantitative easing does appear to have been pushed back to next year, it would take a further delay to provide gold with any real impetus.
For now, China appears to be single-handedly holding up gold, making figures on its buying all the more crucial in the next few months.