Shanghai Gold Exchange Volume Soars To Record As India Gold Imports Surge To 18 Month High

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While the recent move in gold lower, attributed primarily to the fickle rotations of assorted hedge funds who have gotten crushed on their AAPL holdings and thus forced to liquidate profitable positions mostly in ETFs and other paper gold representations (as demand for physical precious metals has never been greater), has seen many pundits scream (as they do every year) that the move higher in gold and precious metals is over, what everyone as usual forgets is that the big move up in gold in 2011 was not driven by Soros or Paulson or Einhorn buying (or selling) laughable amounts of the yellow metal but by relentless end consumer demand out of China and India, when inflation was surging. And with the entire world now openly reflating the one country that has the lowest buffer to hot external money - China - is about to see prices for all products go parabolic once more. It's just a matter of time. Of course, last week's Lunar New Year and closed exchanges bought some time for the bearish gold thesis, but that is now over, quite literally with a bang as demand out of both China and India explodes out of the gates, proving that the sensible money is merely waiting for every dip in the PM complex to buy.

As GoldCore reports, gold volumes for the benchmark cash contract on the Shanghai Gold Exchange soared to a record today (see chart below), as the market re-opened after the New Year’s week long holiday and bargain hunters started buying.

The volume for bullion of 99.99% purity exceeded 22,000 kilograms (22 metric tons), according to data compiled by Bloomberg. Prices fell 2.8% to 327.25 yuan/gram ($1,630.29/oz) as of 5:04 p.m. Singapore time.

“Chinese investors returned to the market today after the holiday, and the slump in gold prices in the past week provided great incentive for buying as many Chinese are still holding a bullish outlook on gold,” Qu Mingyu, a trader at Bank of China Ltd., the 4th largest lender by assets, commented today.

As for India, this article from the  Gulf Today should put to rest any worries that Indians have, after centuries of treating gold as true money, suddenly stopped doing so after a brief 10% pullback.

India’s gold imports surge 23% in January

India’s gold imports in January surged 23 per cent from a year ago to their highest in 18 months as traders snapped up supplies ahead of a hike in duty, undermining the government’s efforts to control a ballooning current account deficit.

The world’s top bullion buyer imported 100 tonnes of gold last month, the head of the Bombay Bullion Association said on Friday. This is about 40 per cent more than the country’s average monthly imports last year.

“The total imports figure for 2012 was around 860 tonnes, so 100 tonnes in a month is too high. Also oil is trading firm above $95 (per barrel), so this will impact the oil import bill and overall deficit targets,” said Navneet Damani, associate vice president with Motilal Oswal Commodities.

Alarmed by the mounting current account deficit that hit a record 5.4 per cent of gross domestic product in July-September the government moved to rein in its gold imports - second only to oil in value - by raising the import duty on the precious metal to 6 per cent from 4 per cent on Jan.21.

“So many people imported and dumped gold after rumours from the first week of January of an import duty hike. People waited for the duty to increase and earn more profits,” said Mohit Kamboj, president of the Bombay Bullion Association.

The government will announce its budget for the year beginning April 1, 2013 on Feb.28 and if gold imports continue apace, traders are concerned New Delhi may take further action to curb demand.

The Reserve Bank of India has indicated it could limit gold imports by banks, which corner about 60 per cent of the supply, if the deficit remains at 5.5-6 per cent of GDP for the next three to four quarters

Given India’s passion for the precious metal, traders and industry experts expect any impact from the Jan.21 duty hike to be short term. They see imports tapering off in February and March and the bearish mood lifting after that.

Gold is considered a sign of wealth and good fortune, and is traditionally given at weddings and festivals in India.

Demand could be as much as 965 tonnes in 2013, the World Gold Council said on Thursday, without giving an estimate for imports. In 2012, imports accounted for virtually all the demand of 864 tonnes at 860 tonnes - down 11.25 per cent from a year ago, partly as a result of a previous tax hike.

Spot gold prices have gained for the last 12 years and its attraction, while Indian inflation continues to eat into returns from other investments, remains high.

If prices do not rise any more in the next two to three months, buying will re-emerge, said Daman Prakash Rathod, director with Chennai-based MNC Bullion.  India’s fiscal deficit is expected to reach 5.3 per cent of gross domestic product by the end of March.