India-China-Gold

INDIA/CHINA/GOLD
India can overtake China as the largest gold consumer this year. Since 2012, China has been the largest consumer of gold. Last year, China’s gold demand bounced back from 2020’s nine-year low by 55% to 993 t (source: World Gold Council). India has been narrowly behind China, averaging 711 t of annual gold demand since 2012, and in 2021 usage was 794 t. India is the largest importer of gold, bringing in an average of 64t every month, as domestic gold production is minimal (1.55 t in 2020). Jewellery is the primary consumer demand segment in both nations, in India making up 77% of demand and in China 70%. The remainder is from bar and coin sales.

Demand fell in Q1’22 for both China and India. Lockdowns and travel restrictions in major Chinese cities during Q1’22 resulted in an 11% quarter-on-quarter decline in China’s gold consumption. India saw a large swing to the downside in gold demand in the first three months of 2022, from 344 t in Q4’21, down 44% to 136 t in Q1’22 as a result of normal sales seasonality and the high price sensitivity of the market. Q1 demand is typically below average, and first-quarter gold prices were elevated as the market reacted to the conflict in Ukraine in late February, ultimately reaching an all-time high in rupees.

India saw a recovery in May. High prices supressed gold demand and the gold price fell by nearly 7%. However, in early May demand was robust as the price decline coincided with the Akshaya Tritiya festival – an auspicious time to buy gold. India’s gold imports in May were up 822% year-on-year to 102 t. May is typically the strongest month for gold imports, but this year’s total is 26% higher than average, demonstrating healthy demand.

India will likely overtake China this year. Chinese consumer demand for gold is now expected to contract year-on-year in 2022. Globally, the gold price will be under pressure from rising interest rates for the remainder of the year, with a lower price being beneficial to Indian demand. A moderate boost to demand in India year-on-year would result in the country becoming the top global consumer.

Economic headwinds will dampen Chinese demand for 2022. China’s commitment to a zero-Covid policy stunted gold demand in H1’22 and has resulted in a contraction in manufacturing and services PMIs for March-May and a forecast for slower annual growth. This reduces the likelihood of a demand recovery this year. Conversely, India should stage a recovery in demand, as Q1 decline was largely down to normal seasonality plus price pressures.

Ban on Russian gold will not stop flows into the East. Since 7 March, six major Russian gold refiners have been suspended from the LBMA’s good delivery list, effectively stopping the flow of newly refined Russian gold on London trading floors. During the G7 summit last week, the US, UK, Canada and Japan (collectively accounting for 342 t of gold demand per year) officially sanctioned Russian gold exports. Given the restrictions already in place, the new bans will likely have limited impact on the gold price. Much of the world has not sanctioned the metal and flows will continue to the Middle East, India and China where combined demand far outweighs that of the areas that have imposed sanctions.

Dollar going from strength-to-strength pins gold down. Despite a knee- jerk reaction on Wednesday last week in the wake of the European Central Bank Forum, the gold price resumed its downward trajectory, finishing 6.4% down quarter-on-quarter last Friday at $1,807/oz. This makes the second quarter the worst for gold since Q1’21 as rising interest rates, combined with the dollar index reaching two-decade highs, keep investors at bay and prices subdued. ETFs demonstrate the investor sentiment to precious metal exposure. Gold-backed funds recorded net outflows of 827 koz globally in the month of June, an acceleration of the modest 67 koz loss of metal from May.

Global photovoltaic capacity growth led by China in 2021. Worldwide installed solar capacity grew by 19% to 843 GW from 710 GW in the previous year (source: BP), with 36% of growth coming from installations within China, the largest increase of any country or region. Boosts to both domestic photovoltaic (PV) panel production for export and domestic use heavily contributed to China’s silver demand growing by 8% year-on-year to 121 moz in 2021 (source: The Silver Institute). Increasing fabrication has offset decreasing metal content in PV cells, which is now 60% lower than in 2012. PV demand for silver is forecast to continue growing at a comparable rate in 2022, which is bullish for silver as the segment makes up more than 10% of global demand.

Silver finished down last week, in line with the other precious metals. After a brief rally to $21.50/oz last Monday, momentum shifted to the downside, with silver closing the week at a near two-year low of $19.84/ oz, breaking through support and suggesting the sell-off could have further to go.