stock rout: Boon or bane for gold? by Ansuya Harjani
- Writer, CNBC Asia | Wednesday, 8 Jul 2015 | 9:14 PM ET
With China's stock market
meltdown now into its fourth week, what does this mean for
gold demand out of the world's second largest consumer of
the precious metal?
"Given that one of the reasons for
gold's tepid demand in China is due to the strong equity
bull market, questions are now raised if the current bearish
'A' share market could spark Chinese interest in gold once
more," Howie Lee, investment analyst at Philip Futures,
wrote in a note on Wednesday.
Chinese equities plunged to a four-month
low on Wednesday, as panic selling gripped markets despite
fresh measures by the government to shore up confidence,
including easing rules for insurers to invest in blue-chips
stocks, raising margin requirements for short positions
against small-cap stocks and warning against "irrational
Investors so far have taken little comfort
from these steps, with the benchmark Shanghai Composite
down over 32 percent since hitting a seven-year peak of
5,166.35 on June 12.
Lee says while a rotation of funds into
precious metals is possible, many Chinese retail players
have had their hands burnt by the recent share market pain
"There are simply not enough funds
to put into rotation; if anything these losses may mean
even lesser demand for gold jewellery and bullion demand,"
China lost its position as the world's top
gold consumer to Indiain 2014. Indian demand totaled 842.7
tonnes last year, compared with 813.6 tonnes in China, according
to data from the World Gold Council.
Demand fell in both markets in 2014 from
record levels a year earlier, but Indian demand slumped
only 14 percent, compared with a far sharper 38 percent
plunge in China. The mainland's appetite for gold has cooled
notably after the 2013 buying spree that was spurred by
a steep drop in prices.
"With pent-up demand satisfied (overloading
of gold has since been an issue) and most markets looking
bearishly on gold, there is little reason for the Chinese
to hoard gold now," Lee said.
Gold has performed poorly so far this year
due to a stronger dollar that has damped the appeal of the
yellow metal. It is down 2 percent year-to-date, currently
trading around the $1,156 per ounce level.
Victor Thianpiriya, commodities strategist
at ANZ, on the other hand, views the rout in Chinese shares
as a positive for gold demand.
While Chinese investors may have gotten
burnt by the market turn, Thianpiriya notes: "Equity
investments as a portion of total wealth in China is quite
Chinese households still park most of their
wealth in cash and deposits, with less than 15 percent of
their financial assets are invested in stocks, according
"Anecdotally, speaking to Chinese jewelers
over past few months, one of the big reason that jewelry
demand has been weak us because of the rising equity market,"
"So if we remove that – we could see
demand pick up into precious metal and more diversification
of assets," he added.
Having said that, Thianpiriya doesn't think
pickup in demand will be a big enough catalyst to boost
"There's no real shortage of gold out
there. Plus if you look at the price action in markets –
everything is getting hammered. It's a big risk-off that
we're experiencing at the moment," he said.
Adding to that, the precious metal still
looks to be moved by the strength of the dollar, Lee of
Philip Futures noted.A stronger greenback makes dollar-traded
commodities more expensive to holders of other currencies,
thereby dampening demand.
"Things are not looking bright for
the precious metal and it appears that prices are running
lower ahead of the expected September rate hike [by the
Federal Reserve]," Lee said.