Gold Price Volatility to Rise on China "Hard Landing"
Thursday, 7/25/2013 13:08
China "hard landing" sure to drive Dollar higher, commodities down. Gold price volatility very likely, says SocGen...
VOLATILITY is the only sure outcome for the gold price of a possible "hard landing" in China's economy, according to new analysis from Societe Generale.
A "sharp increase" in the gold price is "possible", however, if central banks worldwide respond as they did the Western financial crisis starting in 2007 by creating money through quantitative easing.
"Our core scenario is that China will see a bumpy landing over the medium term," says SocGen's new
Cross Asset Strategy update.
"[But] we think many investors may still be relatively complacent about the risk of a hard landing. This could prove a costly mistake."
Chinese households are now the world's second-heaviest buyers of gold, and may overtake India in 2013 at current rates of demand. Deregulation of China's precious metals market since 2002 has been seen by many analysts as playing a big part in the gold price rise.
Now forecasting a possible 4% drop in China's GDP next year from 2012 levels, SocGen warns that all asset classes would be affected, with copper and crude oil perhaps dropping 30% or more.
Most certainly, the US Dollar – "despite [any] additional QE from the US Fed" – would likely rise by 10% against a basket of other currencies inside 12 months.
The gold price "could initially bounce on a Chinese hard landing," says the Societe Generale report. "But since Chinese savers are big buyers of gold, the impact here could also be short lived.
"Volatility of gold will rise."
Writing today in
City AM – the free London newspaper distributed in the UK capital's financial districts – China has failed to shed the problems of its "command economy" says James Gorrie, author of
The China Crisis (published this year by Wiley)
"At some point in the near future, the falsity of China’s economic and social stability will undermine the Yuan (even if it is backed by gold)" Gorrie says, "and everything else about the Chinese economic 'miracle'."
Gold prices could initially "rise around 15% but then drop very quickly," says SocGen, pointing to the pattern seen when Lehman Brothers collapsed in late 2008.
Noting that Western investors have been selling gold so far in 2013, a hard landing in China "could initially accelerate this process, resulting in a lower gold price," the investment bank's analysis goes on.
"But if global central banks respond with further QE, then gold could see a sharp bounce from the initial sell-off."
Not making any specific recommendation to clients on gold, all the analysis "can say with confidence" is to expect greater volatility in the
gold price should China's economic boom end with a crash.
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