China is on way to reasserting its position as the world’s largest gold consumer with trade data showing strong imports. No wonder, despite tepid demand conditions in India and bearish investor flows international gold prices have held up quite well above the $1,300 an ounce mark in the last few days. Gold and silver started the week strongly with price gains of over 2 per cent on the back of strong Chinese data that boosted the sentiment. An additional factor was, of course, the recent weakness in the dollar.

According to a local industry group China Gold Association, demand for gold in the first half of the year was estimated at over 700 tonnes, rising by an enormous 54 per cent year-on-year, translating to an additional 247 tonnes. “What’s more, this number is not far off the 761 tonnes recorded for the whole of 2012,” commented an analyst. In the second quarter this year, demand was an implied 386 tonnes, up a staggering 89 per cent year-on-year.

According to reports, the largest increase was in investment bar demand that was up 87 per cent year-on-year in the first half 2013 (at 279 tonnes) and 131 per cent higher year-on-year in Q2 (at 154 tonnes).

Jewellery demand gained 44 per cent year-on-year in H1 2013 and 80 per cent in Q2 2013. It is well known that China’s domestic production of gold has also been growing strongly. Local gold mine production is estimated to have risen to 193 tonnes in H1 2013, up 9 per cent year-on-year.

So, despite not-so-positive macro backdrop, investor interest and market fundamentals, the yellow metal has managed to stay relatively firm, supported by Chinese demand. How long the current relative firmness will last is the big question engaging everyone’s attention. To be sure, ETP outflows have so far reached 667 tonnes, 24 per cent from its peak. Also, according to the latest CFTC data, gross short positioning remains elevated. This in turn leaves scope for additional short covering activity. But changes in the market perception with respect to Fed tapering or weaker-than-expected data could trigger creation of additional gross shorts, exacerbating the downside for gold prices. Beyond the current firmness, most analysts are agreed that gold prices will move down to $1,200/oz.

Meanwhile, to further squeeze gold and silver imports that are seen as a drag on foreign exchange reserves and contributing to current account deficit, the Indian Government has hiked customs duty on import to 10 per cent. Importers, unsure about documentation and other obligations associated with imports, are moved to the sidelines.

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