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High Gold Price Strong on China's New Year Return Ahead of the Fed, But Sinks Indian Demand

GOLD PRICES in the US Dollar firmed on Monday as financial markets looked ahead to this week's interest-rate decisions and inflation comments from the Federal Reserve, the European Central Bank and the Bank of England, while the price of bullion in China and India, the two biggest gold consumer nations, rose to multi-year and all-time highs respectively, writes Atsuko Whitehouse at BullionVault.
With analysts and traders expecting the US Fed to slow, pause and then start reversing its interest-rate hikes in 2023 while the Eurozone and UK catch up, the Dollar index – a measure of the US currency's value versus its major peers – today edged down to near an 8-month low. 
That saw spot gold steady above $1926 per ounce, down from Thursday's new 9-month highs near $1950 per ounce after the benchmark price in London – the precious metal's global trading and storage hub – just failed to make a 6th consecutive weekly gain on Friday afternoon.
"This gain [in gold] is believed to be largely driven by investors looking to mitigate risk and in anticipation of a slowing in / cessation of the Fed's rate cycle," says analysis from Rhona O'Connell at brokerage StoneX Group Inc. 
Gold prices on the Shanghai Gold Exchange meantime began the new Year of the Rabbit unchanged on Monday from pre-Chinese New Year at ¥422 per gram, the highest since September 2020.
As China's financial and wholesale bullion markets reopened after the Spring Festival holidays, the price of gold in Shanghai continued to show a strong premium to London, increasing to $13 per ounce today, more than 60% above the typical incentive to new imports of gold into the metal's No.1 consumer market.
Chart of Shanghai gold price (Yuan per gram) vs. premium to London quotes (US$ per ounce). Source: BullionVault
Gold prices in India, the No.2 gold consumer nation, hit new highs on Monday, beating last week's fresh high to reach 57,149 Rupees per 10 grams.
The high gold price already forced dealers to offer discounts of as much as $42 an ounce below London quotes last week inclusive of 15% import and 3% sales levies, versus a discount of $24 the previous week.
"Dealers and jewellers have been postponing purchases on hopes the government would cut import duty in the upcoming budget," Reuters quotes a Mumbai-based dealer with a private bullion importing bank.
India's government budget will be presented on 1st  February, with dealers and jewellers now making their annual plea for New Delhi to slash the gold import duty to undercut smugglers and boost legal demand.
Increased smuggling has contributed to legal imports sinking 79% last month from a year earlier to the lowest December level in at least two decades, Reuters adds, citing commerce ministry sources – a view denied last month by finance minister Nirmala Sitharaman.
Gold priced in Euros fell 0.4% to €1766 Monday lunchtime as the 19-nation single currency strengthened against the Dollar in FX markets, while the UK gold price in Pounds per ounce edged lower 0.2% to £1554.
Longer-term Eurozone interest rates also climbed after stronger-than-expected inflation data from the region's 4th largest economy Spain "caught markets off guard" according to one strategiest ahead of the European Central Bank's interest rate decision on Thursday.
Germany's 10-year government bond yield, the currency union's benchmark rate, rose above 2.31%, the highest in 2 weeks.
In contrast to Spain's rise to 5.8% year-on-year inflation in January, well above analysts' expectations of 4.7%, inflation on the USA's core personal consumption expenditures measure – the Federal Reserve's preferred gauge, which excludes food and energy costs – slowed to 4.4% year on year last month from November's 4.7% reading.
"If bond markets' projections [of the Fed's rate decision] are too benign, given the rhetoric from the bankers themselves, we may yet find the bond markets coming under pressure accordingly," says O'Connell at StoneX
"That would take some of the sheen off gold but would be unlikely to see its price trajectory reverse course."
The Fed is almost universally expected to slow its pace of interest rate increases to a 0.25-point rise at its meeting on Tuesday and Wednesday, taking overnight borrowing costs up to 4.75% after 4 consecutive hikes of 75-basis points and then a 50 bps rise in December.
Both the Bank of England and the European Central Bank, meanwhile, are forecast to lift their main interest rates by 50-basis point to 4% and 2.5% respectively on Thursday.

Atsuko Whitehouse is the Head of the Japanese Market at BullionVault and the Editor of Japanese GoldNews.

See all articles by Atsuko Whitehouse here.

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