Is China Still Interested in Gold?

“International supervision over the issue of U.S. Dollars should be introduced and a new, stable, and secured global reserve currency may also be an option to avert a catastrophe caused by any single country.” -China’s official news agency Xinhua

After hitting new multi-year lows earlier this year, precious metals finally appear to be building momentum to the upside. A new report reveals that China, the world’s second largest gold consumer, is still buying gold at an impressive pace.

On Monday, the price of gold closed higher for the fourth consecutive trading day, as the China Gold Association released its latest demand figures. In the first six months of the year, domestic gold purchases surged 54 percent to 706.4 tons from a year earlier. In comparison, the region consumed 832.2 tons in all of 2012.

Demand for gold bars and jewelry items easily outpaced the weakness seen in the industry category. Gold-bar purchases surged 87 percent to 278.8 tons while jewelry purchases jumped 44 percent to 383.9 tons. The World Gold Council estimates that China will surpass India by the end of this year for gold consumption.

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The recent plunge in the price of gold was a significant factor in demand. Chen Min, a precious metals analyst at Jinrui Futures, tells Reuters, “China bought a lot when prices fell below $1,350 in April thinking it will not fall further. They bought much more than usual in April and May to meet the need for later in the year.”

Over the course of only two days in April, gold plunged $200 to reach its lowest level since February 2011. In the process, gold posted its worst one-day percentage drop since 1980, and the largest fall in dollar terms on record. On a technical basis, gold reached its most oversold reading since at least 1975. The dismal performance was followed with a 5.4 percent loss in May.

While some demand might have been pulled forward in China, investors appear to be warming up to gold again. Holdings in the SPDR Gold Trust — the most popular exchange-traded gold product — saw its holdings increase by 1.8 tons to 911 tons on August 9, representing the first increase in almost two months. Shares are down about 20 percent year-to-date, but have gained 11 percent since the bottom made in late June.

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Disclosure: Long EXK, AG, HL, PHYS

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