The plunge in the price of gold has triggered a buying spree for jewellery and bullion in Hong Kong, Shanghai and Beijing as some investors judge the decline has gone far enough.
"The sell-off is overdone as there's no fundamental support in the shift of gold demand," said Mitul Kotecha, head of global markets research Asia for Credit Agricole CIB.
In fact, gold in London swung back 3.6 per cent to US$1,401.24 an ounce after tumbling 14 per cent over the past two trading days. Prices fell 9.1 per cent on Monday, the most since 1983, and have lost 29 per cent since their peak in September 2011.
The dramatic decline stemmed in part from a belief that the US and China are unlikely to push further strong economic stimulus measures, reducing the appeal of gold, a hedge against inflation. The weak global economy has dampened the appeal of commodities. Troubled Cyprus could also sell its gold reserves and other nations might follow.
Still, bottom-fishing on gold is risky. "It's a bit like catching a falling knife if you try to guess where the bottom is," Kotecha said.
A Credit Suisse report on Monday said initial support for gold would be at US$1,310, followed by US$1,156 and US$1,122.
"Should the latter be breached that would turn the spotlight on the big psychological level of US$1,000," the report said. Fund managers believe lower prices would curb gold production.
"Below US$1,300 gold, about 30 to 40 per cent of mine production is probably not cash-flow positive," said Joseph Wickwire, manager of Fidelity Investments' Select Gold Portfolio fund.
The price slump has sparked a buying spree in Hong Kong, Shanghai and Beijing for gold jewellery and investment-grade bullion. An HSBC report said the gold price was likely to stabilise when a greater recovery in jewellery prices began in emerging markets, namely China and India. Jewellery accounts for almost 45 per cent of gold demand.
Chow Tai Fook, the world's largest jeweller, said gold sales had surged in the past two days. Mainland tourists in particular snapped up bracelets and nuggets, managing director Kent Wong said.
At a shopping mall in Shanghai's Yuyuan Garden, jewellery shop assistants were run off their feet yesterday. "Some of the bullion has sold out, and we're worried that the company won't be able to supply enough products to meet the demand," a shop assistant said. Lao Fengxiang, the city's oldest jewellers, sold bullion at 340 yuan (HK$422) per gram, down from nearly 420 yuan last year.
In Beijing's largest gold shop in Guanganmen, in the Xicheng district, shoppers crowded the counter selling gold bars. A shop manager said the number of customers yesterday was almost triple that of normal days.
Gold investor Zhao Shuo withdrew most of his family's savings to buy two 300-gram bars in the shop. "The price is close to that of three years ago. You cannot expect it to drop too much from now," he said.
Recent disappointing economic data from China could dampen any recovery in gold prices. "China and India account for about half of global gold consumption - they are not speeding up in terms of economic growth, meaning demand will not grow that much," said Tai Hui, chief market strategist Asia at JP Morgan Asset Management.