May 10, 2014 4:20 am JST

Gold prices weak on soft Chinese demand

TOKYO -- Gold prices are growing top-heavy as Chinese consumers and investors increasingly have second thoughts about buying bullion and jewelry made out of the precious metal.

     On April 15 in New York, gold futures tumbled $42 at one point from $1,326 per troy ounce after the release of a World Gold Council report.

     The report predicts a 20% rise in Chinese consumption of gold by 2017, but investors instead focused on a projection of limited demand growth for 2014. Demand will come to 1,000 tons to 1,100 tons this year, hardly changed from 2013, explains Albert Cheng, managing director for the Far East and the paper's author.

     Those on the retail front also offer a bearish view. A major jewelry chain in China sees sales falling 10% on the year by volume in 2014.

     Gold futures now trade at around $1,300 per troy ounce in New York amid a mixture of factors including geopolitical risks surrounding Ukraine and the U.S. economic outlook.

     Normally, spot prices in Shanghai tend to be higher than New York because of shipping and other costs. But with demand softening in China, prices have often been lower since March.

     Chinese investors and consumers were previously eager to purchase gold even when prices stayed above $1,500. But now, "with no clear direction of the market, they are taking a wait-and-see stance," says Tatsufumi Okoshi, senior economist at Nomura Securities.

     Consumers in China are not alone in their change of heart. Concerns are emerging about gold that businesses had purchased to use as collateral when procuring funds. When fears about a credit tightening in China spread this March, investors speculated that copper -- another metal used for obtaining funds -- could be dumped. This led to a sharp drop in copper prices.

     Chinese companies are said to have bought up an aggregate 1,000 tons or so of gold for financing purposes between 2011 and 2013. Its market value totals 4.2 trillion yen ($40.9 billion). Should the economy slow further, some of the gold might be unloaded in the market, according to a Japanese trader.