There is still evidence of robust physical gold demand, says Blackrock’s Raw

Catherine Raw, portfolio manager of the BlackRock World Mining Trust, says gold demand is still strong in China and India.

Sentiment has clearly turned bearish on gold as year-to-date the price has fallen by 22%. The continued strength of the US economy and recent comments from the US Fed on ‘tapering’ of quantitative easing has caused inflation fears to subside, particularly with the US treasury market starting to price in an end to QE and rising interest rates.

We also continue to see selling of the gold ETF with total gold ETF holdings currently at 73.1Moz today versus close to 90Moz at the beginning of the year, as financial investors start to move out of gold. Furthermore, net length in the speculative futures market, where we saw significant selling back in April, is currently at the lowest level in more than a decade.

However, there is still evidence of robust physical gold demand, particularly out of China and India, with traditional physical buyers looking to take advantage of the lower gold price. At the same time scrap supply is down and we anticipate a pick-up in Indian jewellery demand ahead of Diwali which typically sees gold buying from August onwards.

In addition, recent comments from both the Bank of England and the ECB, as well as previous actions taken by the Bank of Japan, illustrate that monetary policy around the world remains focused on stimulating economic growth and as such would suggest the potential for inflationary pressures to creep into the system in coming years is high.

On gold equities, at today’s gold price there are a number of gold mining companies that are facing asset impairments and write-downs of reserves & resources. The gold producers are already taking steps to reduce costs, however, we would expect to see further growth projects delayed and loss making production curtailed as management reassess higher cost production.

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