Physical demand wanes above $1,750

With gold falling from just below $1,790 to as low as $1,689 at one stage late yesterday, we look at the behaviour of the physical market over the past 4 months to determine what the potential behaviour might be. More specifically, we look at our Standard Bank Gold Physical Flow Index (GPFI). Our GPFI tracks actual physical gold flows that Standard Bank sees — much of these flows are into Asia and India. An index
value below zero indicates the physical market is a net seller, while a value above zero indicates the physical market is a net buyer. The greater the index value (in absolute terms), the stronger the buying/selling forces.

The behaviour of the physical market does indicate that this segment is price-sensitive. The general trend is fairly consistent: when the gold price moves lower, physical demand rises. When the gold price rises, physical demand falls away. Back in November, when seasonal demand was strong, we saw physical demand push higher after gold declined from $1,800 to $1,700. Demand grew even stronger in mid- December after the drop below $1,500. However, with seasonal demand waning towards the end of January, a gold price
above $1,700 since the start of February has seen a steady decline in physical demand (as is evident in the steady decline in our GPFI index).

We note that the physical market adapts to higher prices over time, i.e. levels that were seen as too high a few months ago, are now seen as good buying opportunities. That implies that where this segment of the market saw gold above $1,700 as too expensive, these expectations may adapt, and this level may be seen as a buying opportunity. However, we also note that February to June is typically a period where physical demand
is weak (relative to the rest of the year). As a result, we believe that there may only be really strong support closer to $1,650.

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