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China drives gold demand, or doesn’t it?

“When I was in China recently, everyone I spoke to was concerned about inflation,” he told an audience of fund buyers at the Expert Investor Luxembourg forum last week. “That’s why they’re buying gold. So if we see negative real rates there, this will be very good for gold.”  

Much of the demand from Chinese retail investors is probably speculative, as they are looking for new lucrative ways to invest after their local stock market crashed last year. But there is also some important structural demand emerging. “Even central banks in emerging markets are buying gold now, in order to diversify their reserves away from the dollar,” said Alexis Freyelsen, a GEM equity manager at UBS who also spoke at the Luxembourg forum.

However, the alleged demand uptick in Asia was challenged by Sim Mo Siong, a currency strategist at Bank of Singapore, who expects gold prices to trend sideways in 2016 “within a broad choppy range of $1170 to $1320”, he told Expert Investor’s sister publication Fund Selector Asia. “The latest gold import data by India and China continue to suggest weaker appetite in gold among consumers this year, and this underlying subdued interest implies that lower prices would be required to reinstate demand,” he said.

Silver lining

Considering the above disagreements about whether or not demand for gold is actually rising, it might be a better idea to focus on other metals. After all, gold is not a productive asset and demand is therefore highly dependent on sentiment.

It wouldn’t be a bad idea to therefore invest in silver instead, according to Schroders’ Lacey.  “Mine supply of silver is down 10% this year, and the current price ratio versus gold is at 72:1,” he said. “It’s a bit more volatile, but at this ratio you’re buying silver at good value relative to historical levels.”

Part of the Mark Allen Group.