Gold physical demand still strong

Focus: Gold physical demand still strong

At the start of last week, we reported on the very strong demand response from the physical market due to the drop in the gold price below $1,180. This demand has continued unabated. The gold price decline comes at a good time, especially for the Indian market but also other markets such as Turkey where price elasticity is being assisted by a very strong seasonal demand reaction.

Physical market demand is evident from our Standard Bank Gold Physical Flow Index (an index value greater than zero confirms buying activity in the physical market; the higher the value, the
greater the buying momentum. An index value less than zero confirms selling in the physical market). The demand response in the physical market has been confirmed by the pick-up in premia in Asia over the past few days.

The seasonal demand response of Q4 is due to rising jewellery demand during this period. While gold jewellery demand (in absolute levels and as a share of total demand) has been declining
over the past few years, the recent demand response in the physical market is evidence of two key factors in the gold market: firstly, physical gold demand and, more specifically, jewellery demand, is very price-sensitive, especially with seasonal demand expected to pick up in less than a month. Secondly, although the price of gold has fallen sharply in recent days, it is still high compared to last year this time (gold in INR is 20% higher than the same time last year). This seems a clear indication that physical demand is adaptive and that price expectations adjust alongside developments in the gold market.

We still see gold heading towards $1,300 by Q4:10 driven by physical demand and investment demand

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