Gold is in unfamiliar territory – firmly wedged between competing influences

Gold bulls must be wondering what needs to happen for them to catch a break, as recent positive demand numbers from top consumers India and China were blown away by the crisis gripping Turkey.

Spot gold dropped to as low as $1,191.35 an ounce during Monday’s trade, the lowest since January 2017 and taking the precious metal’s year-to-date loss to about 8.4 per cent.

The latest travail for gold is to be found in Turkey’s currency crisis, with the lira plummeting as much as 18 per cent against the US dollar on August 10, although it later rebounded.

The catalyst for the plunge at the end of last week was an escalation of a dispute with US President Donald Trump, in which he doubled the tariff on imports of steel and aluminium from his country’s erstwhile ally in the North Atlantic Treaty Organisation.

Turkey is not a major consumer of gold, but it still bought 21.6 tonnes in the second quarter of this year, and it was the fifth-biggest buyer in the year to the end of June, according to data from the World Gold Council.

Turkish President Recep Tayyip Erdogan urged his citizens to convert their hard currency and gold into lira as part of efforts to support the embattled currency.

It’s not yet clear how his call has been heeded, but it is more than likely that gold demand in Turkey will struggle in coming months as the still-weak lira crimps demand and consumers sell existing bullion.

But in some ways Turkey is just a sideshow for the overall gold market, which is stuck between competing narratives, with the bear story currently holding the upper hand.

The strength of the US dollar is the main headwind for gold, with the dollar index up 4.5 per cent so far this year, as the US Federal Reserve raises interest rates and US equities outperform most global peers.

Gold has traditionally struggled to rally during periods of dollar strength and monetary tightening in the US, and so far the current cycle is proving no exception.

Some investors are fretting about equity values after a long bull run, and the possibility of world economic growth being knocked lower by Mr Trump’s escalating trade dispute with China and other nations.

However, these issues are threats that have yet to manifest themselves meaningfully, and until they do, they will not offer much support to gold.

The positive story for gold comes from top buyers China and India, but even here it’s at best an emerging factor rather than an established trend.

China’s net imports of gold from Hong Kong, the main conduit for imports, jumped 40.3 per cent in June to their highest since March 2017, according to data provided to Reuters by the Hong Kong Census and Statistics Department.

Imports via Hong Kong by China, the world’s top consumer of the metal, rose to 80.867 tonnes in June from 57.649 tonnes in May, the figures showed.

China’s second-quarter gold demand was 214.4 tonnes, according to the World Gold Council, up 7 per cent from the same quarter last year.

It was in the first quarter that demand increased from the year-earlier period since the third quarter of last year, giving tentative hope that Chinese demand may be recovering.

India’s imports gained for the first time in seven months in July, according to provisional data from consultancy GFMS, which is owned by Thomson Reuters.

Imports were 75 tonnes in July, up 44.2 per cent from the same month last year, with GFMS citing a decline in prices as encouraging jewellers to replenish stocks.

However, July’s boost in India’s imports comes amid a generally weak trend in the world’s second-biggest bullion consumer market, with shipments in the past three quarters down from the corresponding periods a year earlier.

Nonetheless, there are signs that weaker prices are spurring some additional consumer demand in Asia, which may provide support to gold in the months ahead.

Certainly investor interest is muted, with net inflows into exchange-traded funds declining in the first two quarters of 2018 compared to the same periods a year ealier.

Speculators also increased net-short positions in Comex gold futures to a record in the week to August 7, according to US Commodity Futures Trading Commission data last week.

While it’s possible that an excess of short positions could result in a rapid reversal in prices, in the absence of an unexpected event, it’s hard to see the trigger for a gold rally.