Gold enjoyed a strong upward move yesterday as bond yields dropped. Gains on the gold market accelerated following release of the US CPI data on April 13. It can be seen on the chart below that the first upward impulse was launched following the inflation report, and it has also benefited EURUSD and TNOTE (yields dropped). Second upward impulse on gold was launched yesterday after release of the US retail sales data and was mostly driven by gains on the TNOTE market. Another upward impulse on gold can be observed at press time and it is being driven mostly by EURUSD and to lesser extent by gains on the TNOTE market.
Gold jumped following the release of US CPI and retail sales data this week. Source: xStation5
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Create account Try a demo Download mobile app Download mobile appSurprisingly, it turns out that physical demand from China can become a major driver for gold prices. China is the world's largest consumer but prices of commodities tend to jump at times Chinese imports of that commodity rise. It was the case with corn or soybean in the middle of 2020. According to the latest media reports, China has allowed domestic and foreign banks to start importing large amounts of gold into the country. 5 different sources confirmed this news to Reuters. In case banks start to buy and import gold into China, it may have an impact not only on gold market fundamentals but also on the availability of physical gold for investors.
What's the rationale behind the decision of Chinese authorities? The United States decided to impose new sanctions on Russia. Under a new set of sanctions, banks are banned from participating in the primary market for RUB-denominated Russian debt. What impact does it have on China? Currently none but in theory, the United States could decide on similar measures against China should relations between the two deteriorate further. China may use gold purchases to boost its credibility. Apart from that, China could in theory decide not to buy new US debt or even sell currently-owned US bonds as a retaliation. Such actions could lead to a massive spike in yields and could trigger a market crash. However, it should be noted that it is not the base case scenario.
Back to the main topic. It should be noted that once China starts to buy large amounts of gold, its availability for investors, like ETFs, would diminish. Bond yields are currently the most important driver for gold prices but large inflows into precious metals ETFs at times of limited availability of physical commodities could spark another upward impulse on the gold market.
As one can see on the chart above, ETFs have been net sellers of gold recently. Whether this trend holds or breaks could have a big impact on gold prices moves. 2020 was a record year for gold in terms of price levels or price gains, and it has been to a huge extent driven by strong investment demand. Source: Bloomberg
Gold has been enjoying solid gains since the beginning of April. There is a chance for a bullish engulfing pattern to surface on the monthly interval. Pattern would be painted near the upward trendline, what may boost its significance. Source: xStation5
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