TOKYO/NEW DELHI/HONG KONG -- President Donald Trump's latest tariff salvo as well as the first rate cut in the U.S. in more than a decade are conspiring to boost the price of gold futures but dampening demand for physical gold among individuals in Asia.
Gold futures on the COMEX market in the U.S. surged to a six-year high of $1,522 per ounce early this month after China and America intensified their diplomatic and trade battles. By contrast, the dollar index, which measures the value of the U.S. currency against a basket of its peers, fell to 97.5 in the first week of August, down 1 point from the end of July.
"A weaker dollar had boosted gold and uncertainty over the world economy added fuel to further price increase for more investors buy the metal as safe-haven asset," said Tatsufumi Okoshi, a senior analyst at Nomura Securities.
Gold and the U.S. dollar typically move in opposite directions, and the precious metal is often thought of as a haven for investors. The ongoing U.S.-China trade war and rising tensions between Washington and Tehran had sent investors to seek shelter in gold.
Trade talks between the U.S. and China ended July 31 without any progress amid more recriminations from both parties. Analysts said that even if trade issues were resolved, structural ones remain.
"There is a still conflict between the U.S. and China over industrial restructuring," said Itsuo Toshima, an analyst at Toshima & Associates.
The price of physical gold is also rising, bringing more consumers into stores trying to sell their gold.
But demand from individuals is weak. This, Toshima said, "signals a sell-off in the medium term." He said that Chinese and Indians, the world's biggest buyers, have been put off as they believe the precious metal may now be overvalued. The two countries account for nearly 60% of global gold jewelry demand.
A recent hike in gold import duty to 12.5% from 10% in India has also hit demand for gold. The World Gold Council predicted that the import duty hike could cut demand by 2.4% in 2019. Research company Capital Economics said in a note on July 30 that gold imports fell from $4.8 billion in May to a four-month low of $2.7 billion in June, while prices rose 6% in the same period.
India's gold price in early August hit a record high as the rupee fell to a five-month low against the dollar. To boost demand, Indian dealers have been offering discounts of $24 or more per ounce on the official domestic price to jewelers, their primary customers. Toshima said that the discounts have been rising, reflecting "a gap between supply and demand."
Gold plays a cherished role in Indian culture and serves as a status symbol and key indicator of consumer spending in the country. Demand is strongest in the August to October festival period followed by the November to May wedding season.
G.V. Sreedhar, who runs a jewelry retail store in Bengaluru, said the higher customs duty is encouraging gold smuggling and cash transactions, which in turn impacts gold prices.
Jewelers in China are also facing softer demand. The World Gold Council said jewelry demand in the country fell 2% from January to March this year despite the traditional boost from the Chinese New Year holiday in February.
The Chinese often buy the precious metal as gifts during the period. "Consumers remained wary of the slowdown in the domestic economy, particularly against the background of the international trade conflict," the council said in a report.
Luk Fook Holdings, a Hong Kong-based jeweler, announced in April that same-store sales for January to March dipped 6% from the previous year.
Chow Tai Fook Jewellery Group, another Hong Kong jeweler, plans to add about 500 new stores in mainland China to its 3,134-strong network by the end of March 2020. The company hopes to offset slowing growth in Hong Kong and Macao by redoubling efforts to penetrate deeper into Chinese regional cities, where household income is rising.
A little more than 10% of its mainland stores are in first-tier cities, including Beijing and Shanghai, 50% are in second-tier cities, or core regional towns such as provincial capitals. Slightly less than 40% are in third-tier towns and it is in this sector of the market that the group is making a big push.
In the year ended March, the group's overall sales posted a 13% rise over the year to 66.6 billion Hong Kong dollars ($8.51 billion). While sales in mainland China, which make up roughly 60% of the total, rose 15% in the period, combined sales in Hong Kong and Macao were up only 8%.
This was largely because growth in the special administrative regions came to a halt in the second half of the financial year to end-March due to a worsening of consumer sentiment amid the U.S.-China trade war.
Yasuhiro Chihara, deputy manager at Naito Securities, said that despite the fall in volume, the recent surge in prices will help the bottom lines of some jewelers, although he added that the high prices are unsustainable.
"Given that gold offers no yield, investors and consumers are not likely to buy more gold when prices are rising," said Chihara.