The Bank of China increased it gold holdings in December for the first time since the third quarter of 2016 in major bullish news for gold bugs who are already foaming at the mouth over trade war fears, equities upsets and speculation of a pause in Fed rate hikes.
The rally is definitely on, with spot gold prices enjoying their strongest month in some two years:
The People’s Bank of China increased gold holdings to 59.56 million ounces as of 31 December 2018. That’s up from 59.24 million ounces, where the holding had languished for over two years.
Speaking to Bloomberg, Macquarie Group Ltd (London) commodities strategist Matthew Turner said the Bank of China announcement was “a bullish sign for gold”. But no one is entirely sure why they made the move.
“The reasons could be diversification, a wish to get away from the dollar, but it’s hard to be certain because we just don’t know enough about what their motivations are,” Turner said.
But one development that could dull the shine for gold bugs is demand coming out of India.
Reports have now emerged that last year saw India’s gold imports decline by one-fifth as buyers cut down because of high domestic prices and data shows that local stores are still well-stocked.
Citing an unnamed source “familiar with the data”, Bloomberg noted that 2018 saw India’s gold purchases drop 20 percent from the previous year, falling to 762 metric tons. The news agency also noted, citing the same source, that December saw India’s gold imports drop by 23 percent from a year earlier, to 60 tons.
Analysts blame the slumping rupee for the soaring gold prices on the India market, with a liquidity crunch furthering that slump.
“The trend has been weak as far as [Indian] demand is concerned,” said Gnanasekar Thiagarajan, a director at Commtrendz Risk Management Services Pvt. Ltd., told Bloomberg.
Indian demand, though, isn’t enough to derail gold bugs, who have seen gold prices push higher amid a U.S. dollar index sell-off.
According to Kitco, both gold and silver are being boosted by a drop in the U.S. dollar index, which hit a 2.5-month low on January 9.
On January 10, the ICE U.S. Dollar Index was down 0.7 percent at 95.256.
And now everyone’s watching the Fed.
On January 9, Chicago Fed President Charles Evans, said the Fed was likely to “eventually” push interest rates up slightly into restrictive territory if outlook does not improve. However, St. Louis Fed President James Bullard told the Wall Street Journal that a recession was possible if the Fed insists on more rate increases.
In total, the presidents of three out of 12 regional Fed banks have cautioned over the need to proceed carefully with any rates hikes when it is not clear exactly where the economy is going, Reuters reported.
Last week, Fed Chairman Jerome Powell said he would be patient and flexible this year, leading analysts to believe that the Fed may hold off on rate hikes, which would help sustain a rally in gold.
By Charles Benavidez for Safehaven.com