"I don't think we fully understand the size and the appetite of the Chinese market and its implications for the global price," Jeremy East, global head of metals trading at Standard Chartered told the London Bullion Market Association's conference in Rome this week. However, there are indications that demand is beginning to slow – premiums on the Shanghai Gold Exchange have started to ease – and analysts are not sure another drop in the gold price would trigger further rapacious buying from China.
This year has seen a rebalancing of the gold market. In the west, institutional investors have slashed their positions in gold-backed exchange traded funds on expectations of a shift in US monetary policy, a key driver of the gold price in recent years.
Gold holdings in ETF funds have fallen from a record 2,700 tons at the start of the year to about 2,000, pressuring the bullion price, which has fallen 20 percent to $1,316 a troy ounce in the year to date.
The selling has been countered, but not fully offset, by an explosion in physical demand from consumers in Asia, and in particular China. India also saw record imports earlier in the year before demand was hit hard by regulations. This buying helped gold rally from its April and June lows of $1,360 and $1,199 respectively.
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"Where would the gold price be if China hadn't come in and mopped up?" Mr East commented at the conference. "I wouldn't have been surprised to have seen gold testing its big support level at $1,050."
ETF sales have now slowed but many analysts believe it is a temporary respite and sales will resume once the timing of the tapering by the US Federal Reserve becomes clearer.
"If we look at where ETF holdings stood when Lehman Brothers went under it was around 1,000 tons," Philip Klapwijk, managing director of Precious Metals Insight said at the LBMA event.
"I don't think we are going to see anything like that; but could we see another 200, 300, 400 tons of liquidation? I think that's quite feasible. In 2009, for example, there was just 1,800 tons of gold backed ETFs."