China adds 9 tonnes to gold reserves in March
According to analysis by UBS, China gold purchases in March are similar in volume to what was bought the previous month. That China has been consistently buying gold during the past 9 months – even during periods of FX reserve outflows – suggests that gold is an important reserve asset for China. This also in a sense validates the view that the diversification argument is intact, especially for central banks with very little allocation to gold relative to total reserves.
Official gold purchases expected to slow down
UBS notes that despite the persistence of China’s gold buying, the slowdown in the pace of purchases is also noticeable. Q1 monthly average purchases were at 12 tonnes vs 17 tonnes in 2015. We expect this theme to be in place across the official sector this year – as FX reserves come off, the urgency to diversify is also somewhat diminished.
Official sector likely to remain net buyers of gold
UBS analysts highlight that gold buying has become concentrated among a handful of players makes the market more sensitive to any changes in their gold strategies. The lack of new buyers has also diminished the impact of official sector activity on market sentiment and price action. While there may be some risk of selling from countries that are suffering from lower oil revenues, we assign a low probability of this occurring. We maintain our base case that the official sector should remain net buyers of gold for some time.
Technical & Trading Takeaway
From a trading perspective Gold has continued to respect the symmetry and structure support at 1200. Today’s price action is noteworthy and specifically today’s close will be interesting if we close at the highs. The price action suggest a retest of recent highs at a minimum, with the potential for an extension higher to print the 1300+ i have been watching for to confirm the first leg of a much broader corrective phase for Gold.
If the 1200 support fails then I anticipate a much deeper correction to develop which would see the secondary symmetry swing objective at 1140/30, this area would also present a potential inverse head an shoulders pattern, I have outlined this pattern on the chart below. If 1190 is eroded I will revisit this set up in future reports.
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