THE GOLD PRICE would be vulnerable to sharp falls should China's economy experience a so-called 'hard landing' of a sudden deceleration in its growth rate, even though it might rally initially, according to a report published this week by Societe Generale.
"We define a hard landing in 2013 as one where the official, full-year, real GDP growth rate plummets to below 6%, which we see as the minimum level needed to keep the job market stable and avoid systemic financial risk," say SocGen analysts in a special report titled 'What if China lands hard?'
"Our impulse response model suggests prices would rise around 15% to over $1900/oz but then drop very quickly. This would repeat the pattern of 2008-09, in which gold originally rallied on a flight to quality, but then retraced for three reasons."
One reason SocGen cites for the 2008=09 experience is a Dollar rally brought about by risk aversion, something which the analysts say could happen again, even if the US Federal Reserve responds by extending its quantitative easing program.
"Our China hard landing scenario assumes a 10% [trade-weighted] Dollar appreciation in the first year and this despite additional QE from the Fed," the report says.
"It does not take any great stretch of the imagination to paint an even bleaker scenario in which a China hard landing triggers outright currency wars and protectionist measures on trade flows."
Two other reasons analysts cite for the 2008-9 pattern are lower inflation concerns due to global economic slowdown, and rush to cash that involved gold futures traders closing their long positions.
"Moreover," the report adds, "this time the initial flight to quality might be further tempered by concerns about falling Chinese demand for gold. After India and China made their gold markets more accessible to households during the 1990s and in 2001, rising incomes in both countries drove gold prices higher."
The latest Gold Demand Trends from the World Gold Council shows China made up 25% of world gold demand in the third quarter of 2012, while China and India together accounted for more than half of demand.
A survey of SocGen clients meantime found mixed views on whether a Chinese hard landing would see the gold price rise or fall. The average respondent said they expected gold would drop 5%, with Asian investors seeing a 21% drop. A third of respondents however said they expected a hard landing would see the gold price gain.
SocGen this week became one of a number of investment banks to cut its average gold price forecast for 2013, lowering it from an $1800 an ounce annual price to $1700.
China meantime reported stronger-than-expected expect growth for December, according to official data published this week.