Government bond yields in the US are still important for gold, and the recent decline in
the US 10-year government bond yields is a key reason why ETF holdings have flat-lined
this year. Also, we still to expect the US bond yield to move higher towards year-end,
with a target of 3.75% (currently around 2.66%). This, we believe, is likely to put
pressure on ETF gold holdings.
Therefore, if one assumes that gold will move higher on a sustainable basis where yields
move higher too, one also has to assume that gold physical demand, especially from Asia,
will be strong. It is well known, and evident from China’s import data China, that China
was one of the few pillars of support for gold in 2013.
We continue to monitor developments in Asia, and China in particular. At the moment,
gold demand from Asia is weak. Earlier this month, we would have ascribed this to
seasonality. However, seasonal weakness is over now, so now we ascribe the current
demand weakness to the gold price that moved above $1,300 in recent weeks.
We are witnessing demand weakness in two indicators. The first is the SGE premium,
which has traded in negative for the past three days (see Figure 1). The second indicator
is the YTD run rate for gold demand from Asia more broadly, which is captured in our
Standard Bank Gold Physical Flow Index. We compare the YTD activity relative to
previous years. So far in 2014, we are below the run rate of 2013 (see Figure 2). It is still
early in the year, and worth noting that the gold price’s sharp decline came only in April
last year - the event that triggered the sharp rise in Asia demand. But so far it appears as
if we need another leg down in the gold price to trigger the same reaction.

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