TOKYO -- Ukraine's crisis failed to boost gold prices.
Investors tend to buy gold to protect their wealth during crises. But the price of the precious metal has remained flat because emerging economies are not buying. In particular, the closer supervision of so-called "shadow banks" in China, the world's biggest gold consumer, has exerted downward pressure on the market. Shadow banks are institutions that do financial work outside of the regulated system.
Gold futures in New York trading are hovering around $1,300 per troy ounce. Trading is directionless at present. Gold prices rose in early April but subsequently declined. In Shanghai, gold futures in recent weeks have often been lower than those in New York.
China uses gold as a guarantee to borrow dollar-denominated funds from banks in Hong Kong. The funds are converted into yuan for deposits in the mainland. As interest rates on the dollar are lower than those on the yuan, the practice of borrowing funds at lower rates and lending them at higher rates generate profits from the spread.
Copper and other commodities are also put up as collateral. But gold is more often used for large loans. Some 1,000 tons of gold are estimated to have been procured between 2011 and 2013 in China. Shadow banks were among those buying gold, according to people familiar with the basically unregulated financial institutions.
Chinese officials are supervising shadow banking institutions more closely because of worries about risks created by the system. As a result, "the procurement of gold as collateral seems to be decreasing sharply," said an official at a futures company.
Demand for gold in India is expected to increase, making up for the drop in China. India restricted gold imports last year to prevent a further deterioration of its current account balance. Rumors have emerged that the restriction will be eased once the general election is over in mid-May.
India is likely to regain the position as the largest gold consumer in the world if the import restriction is relaxed. But gold prices have yet to rise as it remains unclear whether or not India will ease restrictions.