Gold Prices set to rise on Robust Demand, Increasing Geopolitical Tensions and an Intensification of the Current Currency War

On Robust Demand, Increasing Geopolitical Tensions and an Intensification of the Current Currency War.

Gold prices remain stuck in a narrow range between $1,290 and $1,305, the downside being limited by geopolitical concerns and the upside being capped by generally good U.S. data, which suggest the U.S Federal Reserve will carry on with the current pace of stimulus tapering.

Meanwhile reports show that the Chinese are buying less gold this year and demand during the Golden Week holidays that began on 1 May dropped some 30% from a year ago.

After an exceptional year for gold sales in 2013, the situation is back to something like 2012, according to Haywood Cheung, president of the Chinese Gold & Silver Exchange Society.

While China surpassed India as the biggest bullion consumer last year, the buying frenzy, triggered by a price slump last April has not been repeated this year.

“Before, when they walk into a jewellery shop, they spend about HK$10,000 ($1,290), and now it’s about HK$5,000 to HK$6, 000,” Cheung told Bloomberg, quoting estimates by the society’s 171 members including HSBC Holdings (NYSE:HSBC) and Chow Tai Fook (OTC:CJEWF) Jewellery Group, the largest listed jewellery chain.

“Last year was something special. We’re back to something like 2012. Wait till next year, we’ll start to pick up gradually and come back to 2013 levels,” Cheung added.

Chinese gold and silver jewellery sales dropped 30% to 20.8bn yuan ($3.3bn, €2.4bn, £1.9bn) in April from a year ago, according to government data.

Net gold imports into mainland China from Hong Kong hovered at 275.6 tonnes in the first three months of 2014 as against 210.5 tonnes in the corresponding period a year ago.

According to the Swiss Federal Customs Administration, more than 80% of Switzerland’s gold and Silver bullion and coin exports found their way into Asia in January.

Some reports show that China imported nearly 1,160 tonnes of gold from Hong Kong in 2013 in the wake of the price slump. Gold consumption in China hovered at a record 1,176.4 tonnes last year.

The flow of bullion from the west to the east was emphasised by the World Gold Council in November 2013, citing higher activity at refiners in Switzerland that were recasting bullion into the higher-purity, smaller-sized bars preferred by Asian buyers.

While the drop in demand is quite substantial, and even though analysts attribute the decline to a weaker yuan, which has made gold less attractive to Chinese buyers of bullion, the fall in Hong Kong shipments coincides with another event. The Chinese government announced the opening of official gold imports through Beijing–the first time foreign bullion sales will be allowed directly through the capital.

Up until now, Hong Kong has been the preferred channel for China’s gold imports. But authorities are reportedly uneasy about Hong Kong’s extensive and transparent reporting on trade. By using Beijng as a port of entry, imports into China may become more opaque, once again.This will allow China’s banks to build a sizeable position in physical gold without global buyers realizing the accumulation is taking place.

The fall in Hong Kong gold trade may not be as significant as it seems if Chinese purchases are moving to more-secretive sales through Beijing. And, this may result in permanent decrease in the amount of trade conducted through other cities.

We could thus be witnessing the beginning of a new era in the global gold market. Of course, there’s no way to know for sure what’s happening with Chinese purchases. But the timing of the shifts in trade is certainly something that is worth considering.

In India, Narendra Modi, the controversial Hindu nationalist won a landslide victory in the country’s general election. Few predicted his conservative, pro-business Bharatiya Janata party, in opposition since 2004, would win 282 of the 543 directly elected seats in India’s lower house and international investors and local businessmen have welcomed the huge mandate for the BJP, which has promised to implement wide-ranging economic reforms. Though economic growth was strong through much of the decade of rule by Congress, it has faltered in recent years.

Even though, India announced yet another hike in the import tariff value of gold on Friday, analysts believe that the new government may ease the restriction on gold imports. Last year duties on gold imports were increased several times. Currently, they stand at 10%. Other measures include an 80-20 rule that stipulates that a minimum of 20% of all gold imported must be exported before further imports can be made. The Reserve Bank of India that imposed the restrictions ignored the fact that gold has been part of the Indian culture for centuries. It’s normal to buy and store gold and give it as a gift at weddings and certain times of year.

The government did not want money going into gold so the government curbed gold imports, causing internal pricing to go through the roof and also were the cause of a dramatic increase in the smuggling of the yellow metal.

As the conflict in Ukraine continues and while the West blames Russia as the cause, Russian President Vladimir Putin has informed multiple European states that Moscow will not supply gas to Europe through Ukraine as of June 1 if Kiev does not pay its bills.

On Thursday, Putin said Russian gas exporter Gazprom had been forced to demand Ukraine pay in advance for gas as of June after its debt for gas already delivered reached $3.5 billion.

Putin also urged European leaders to do more to help Ukraine through its economic crisis and to resolve the standoff over gas, repeating a threat to cut exports if Kiev fails to pay in advance for June deliveries.

As the US and EU threaten to halt Russia from what they perceive as destabilising Ukraine by imposing a string of sanctions against the country, Russia has been working on trade arrangements that minimize the participation (and influence) of the US dollar.

For decades, virtually all oil and natural gas around the world has been traded in U.S. dollars. However, the struggle over Ukraine has caused Russia to completely re-evaluate the financial relationship that it has with the United States. If it starts trading a lot of oil and natural gas for currencies other than the U.S. dollar, that will be a massive blow for the petrodollar, and it could end up dramatically changing the global economic landscape.

According to various sources, Russia’s Ministry of Finance is ready to green-light a plan to radically increase the role of the Russian ruble in export operations while reducing the share of dollar-denominated transactions.

The “de-dollarization meeting” was chaired by First Deputy Prime Minister of the Russian Federation Igor Shuvalov, proving that Moscow is very serious in its intention to stop using the dollar. A subsequent meeting was chaired by Deputy Finance Minister Alexey Moiseev who later told the Rossia 24 channel that “the amount of ruble-denominated contracts will be increased”, adding that none of the polled experts and bank representatives found any problems with the government’s plan to increase the share of ruble payments.

Of course, the success of Moscow’s campaign to switch its trading to rubles or other regional currencies will depend on the willingness of its trading partners to get rid of the dollar. Sources cited by Politonline.ru mentioned two countries that are already willing to support Russia: Iran and China.

Given that Vladimir Putin will visit Beijing on May 20, it can be speculated that the gas and oil contracts that are going to be signed between Russia and China will be denominated in rubles and yuan, not dollars.

While China and Russia both expand their respective currency’s acceptance and accumulate more gold, the US dollar will ultimately lose its status as the world’s reserve currency. And, while most western central banks as well as the Bank of Japan continue to devalue their respective currencies, the on-going currency war will intensify.

The prudent minority won’t be beguiled into holding paper currencies, and instead they will diversify into hard assets, such as gold and silver