Gold premiums in Hong Kong rose to their highest in about five months on Tuesday as Chinese banks stocked up on bullion to avoid a supply crunch when refineries close shop for the year-end holidays.
Gold bar premiums in Hong Kong rose to as high as $1.50 an ounce above London prices, compared to 50 cents to $1 over the past few weeks, dealers said.
"Chinese buying has been picking up," said Dick Poon, general manager of Heraeus Metals Hong Kong Limited. "The banks want to keep some inventory and prepare for the holiday demand around the Lunar New Year."
Refineries typically close around Christmas and New Year, creating a supply shortage which could lead to a spike in premiums, dealers said.
"There probably won't be much supply around until mid-January," said Ronald Leung, a dealer at Lee Cheong Gold Dealers in Hong Kong.
The premium in Shanghai gold prices over London also widened, indicating rising demand in the Chinese market. Spot gold traded on the Shanghai Gold Exchange traded at 343.85 yuan a gram, or $1,716 an ounce, at a premium of about $8 over spot gold.
Demand for retail gold usually rises ahead of the Lunar New Year holiday in China, which falls in mid-February this year.
The pickup in Chinese buying follows data from Hong Kong which showed last week that net gold flows from the former British colony into China in October hit their lowest level since June 2011 due to high prices and weak interest.
INDIA BUYING SLOWS AS PRICES REBOUND
India's benchmark gold on the Multi Commodity Exchange bounced from a one-month low of 30,710 rupees per 10 grams hit last week, and was trading at 31,349 rupees.
"If prices fall to 31,000 rupees there could be good wedding demand for another month and a half," Pankaj Kumar Agarwal, director at Brijwasi Bullion and Jewellers in the northern Indian city of Lucknow.
The wedding season, which started in September and peaked last month, continues until early January. Gold is an essential gift item during this season in India, the world's biggest buyer of the metal.
Spot gold traded around $1,710 an ounce, rebounding from a one-month low of $1,683.79 hit last week.
In Southeast Asia, dealers reported a pick up in demand from Thailand and Indonesia as market players tried to avoid the supply crunch in the end of the year.
"We see buying from Thailand, and Indonesia which has been absent from the market for a while," said a Singapore-based dealer.
The premiums in Singapore were quoted in the range of 70 cents to $1, dealers said.
In Japan, the discount on gold bars narrowed to 50 cents from 75 cents last week, said a Tokyo-based trader.
"We haven't seen much gold selling in recent days," said the trader. "Some manufacturers are purchasing gold to stock up their products before the New Year holidays, so the discount is tighter now."
Market players will watch the U.S. budget talks and the resurfacing political turmoil in Italy, key factors that will affect gold prices in coming weeks.
Refineries will start to shut down before the year end, and their schedule will be closely monitored by physical gold buyers concerned about supply crunch.