Gold Price ‘May Rise’ on Fed Rate Hike But 2015 Investment Sinks as Global Demand Drops 10%

GOLD PRICES steadied against a falling US Dollar on Tuesday in London, trading around $1095 per ounce as Western stock markets bucked another slump in Chinese equities.

Commodity prices also ticked higher, rising from new 13-year lows on Bloomberg’s index, ahead of Wednesday’s expected ‘no change’ decision on US rates from the Federal Reserve.

“It remains our view,” says London-based consultancy Thomson Reuters GFMS, “that a US rate hike this year is already priced into the market.

“An increase [at the Fed’s September or December meetings] could well prompt a review of asset allocations that leads to an increase in gold holdings.”

So far in 2015 in contrast, gold investment in bullion coin slowed to its weakest level since at least 2008 on GFMS’s new data, released Tuesday.

“Retail investment – [meaning] demand for bars and coins – fell another 12% year-on-year” in the April-June period, says GFMS, “and is now some 63% below the Q2 2013 peak” despite strength in Europe, notably Germany.

With the gold price averaging 7% below the first half of 2014, total world gold demand in H1 2015 dropped some 10% annually on GFMS’s data, with jewelry and investment demand from China – the world’s No.1 consumer market last year – dropping “substantially”.

Gold prices in Shanghai today edged higher against London quotes, pushing the premium per ounce – an incentive for new imports – up to $2.50 according to Swiss refining and finance group MKS’s trading desk.

Less demand for gold bullion to use in ‘trade financing’ means imports are likely to fall further from June’s 10-month low, says GFMS.

“All this gold that was used for financing,” agrees Michael Mesaric, CEO of giant Swiss refiner Valcambi – sold this week to Indian jewelry corporation Rajesh Exports for US$400 million – “has been given back.

“There is liquidity in the market and liquidity is cheap. There is no need to use gold anymore,” Mesaric told Reuters, forecasting a drop in China’s imports of perhaps 40%.

Following today’s 1.7% drop in the Shanghai stock market, Beijing assured Chinese investors it will continue to support equities prices after the last 7 weeks’ 30% drop, with the People’s Bank pumping the equivalent of $5 billion into the money market.

“Physical demand in Asia remains lackluster,” says one brokerage today, pointing to “both the Indian and Chinese markets.”

“Market participants,” says a note from South Africa’s Rand Refinery, “will be closely watching the Federal Reserve meeting” for hints of whether a rate rise is coming in September.

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