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Updated 15:34 03/03/21

Physical vs. ETF demand

By Adam Pike, News Editor

26 Oct 2016

The gold price denominated in dollars has risen sharply since the turn of the year, but continued speculation of an interest rate rise in the U.S. has capped the yellow metal's upward trajectory. Gold is up over 20% in 2016, despite lackluster demand from the world’s largest consumers in both India and China. The driver behind the gold price so far in 2016 has been increased demand for ETFs by managed money in the west rather than physical demand.

Indian gold imports have plummeted from 1,000 tonnes to a mere 270 tonnes and Chinese imports from Hong Kong have collapsed 23%. Despite this recent downturn, physical demand in China is expected to rise as investors move to protect themselves from an already depreciating currency and overheated property market. Chinese appetite for physically backed ETFs is on the rise with Shanghai listed ETFs increasing ten-fold in the last 12 months.

India’s love of gold is no secret and physical demand is expected to bounce back following a successful monsoon season for the country's farmers. Rather than buying bars and coins Indians traditionally buy jewellery which is then passed down through the generations. The above-average monsoon is expected to translate into an 11% increase for gold in the next 12 months.

In a functioning market you would expect the price to increase as physical demand rises however, perversely, in recent years the opposite has happened.

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