Chinese Gold Consumption May Fall Despite Surge

Gold prices surged Monday when the China Gold Association announced that Chinese purchases rose by 54 percent for the first half of this year, compared to the same period last year.

This comes after gold prices fell 32.5 percent from the commoditys high last December ($1794.10) to its trough in June ($1211.60). China bought a lot when prices fell below $1,350 in April thinking it will not fall further, said Chen Min of Jinrui Futures.

China purchased roughly 460 tonnes of gold for the first half of 2012 and 374 for the second half of the year. After buying more than 706 tonnes during the first half of 2013, investors need to consider the idea consumption for the second half of the year may slow or fall.

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With prices so depressed during the first part of the year, Chinese purchases may have surged because people were buying for future use. According to The Telegraph, gold plays a crucial role in gift giving, weddings, and other ceremonies.

It is very likely that Chinese citizens bought gold for these purposes with the intent of future use. Year over year demand was up 87 percent for bars and 44 percent for jewelry.

Prices are Creeping Up

Since gold bottomed out in June, the precious metal has risen more than eight percent, including a 5.4 percent jump in the past month. Simple supply and demand dictate that rising gold prices will cause demand to fall. This assumption is hard to make because Asian demand as a percentage of world demand has risen with rising gold prices (pushing prices even higher).

Fear of Another Fall

According to analyst Chen Min, Chinese purchasing accelerated near the $1350 level because investors did not think prices would fall further. Despite strong Asian buying, gold prices fell significantly below that level and are still fighting to regain it.

Because they have been proven wrong, one can assume they will be more hesitant to buy gold when they think it is at a support level in the future.

Gold rallied on Chinese bullishness and was trading at 1336.36 several hours after the stock markets close. Gold miners were todays big winners with the Market Vectors Gold Miners ETF (NYSE:GDX) up 5.82 percent for the day.