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Gold Prices Firm as Beijing Launches 'No QE' Central-Bank Bond Trading

The PRICE of GOLD held onto yesterday's rally in Asia and London on Wednesday, trading unchanged for the week so far in US Dollar terms and nearing 2-week highs against the Chinese Yuan as the central bank in Beijing said it will start trading government bonds to avoid a Silicon Valley-type banking crash, stressing that this doesn't mark the start of QE stimulus in China.
With both the Yuan and the Dollar slipping on the FX market, gold prices in most other currencies were softer, down almost €20 per Troy ounce for the week so far in Euros at €1865 despite weak Eurozone construction-sector data after the ECB made its first cut to interest rates at the start of this month.
The UK gold price in Pounds per ounce was meantime £10 lighter from Friday at £1830 despite inflation dropping to a 3-year low one day ahead of the Bank of England's June interest-rate decision – still expected to see 'no change' from today's 15-year high of 5.25%.
"Domestic [economic] demand has weakened in China as the property market collapse worsens and private consumption growth remains anemic," says analysis from Fitch Ratings, adding that "deflationary pressures are widespread."
"China doesn't have to embark on massive QE just yet," says former People's Bank policymaker Yu Yongding, writing on social-media platform WeChat. "But it's necessary we shake off the thinking that QE is a taboo first so that we can launch it immediately when needed."
"Bond trading by the PBoC wouldn't be Quantitative Easing," claimed the central bank's current chief Pan Gongsheng at a financial forum today, pointing instead to the recent surge in the price of Beijing's central government bonds – and the resulting plunge in long-term interest rates – and warning that "from a macro-prudential perspective [we need] to correct and block the accumulation of financial market risks in a timely manner" to avoid events such as last spring's Silicon Valley Bank crash in the United States.
Chart of China's 30-year central government bond price. Source:
Last month the price of newly issued long-dated bonds from China's central government leapt on their debut, jumping by 1/5th on some markets and driving Beijing's bond yields down to new modern lows.
"If bond yields rise in the future," said an article in PBoC-backed journal Financial News on Saturday, citing un-named regulators, "[investors] will face a large risk of a retreat in capital gains." 
While central government debt may equate to less than 1/4 of China's annual economic output – threatening a shortage of 'safe haven' treasury bonds for domestic investors – the country's total non-financial debt to GDP ratio last year rose to almost 288%, a new record "mainly due to the slowdown in nominal economic growth" according to a state-backed think thank.
That compares with 255% across emerging-market economies as a whole, including financial sector debt.
Chinese gold prices today rose to the highest since 7 June above ¥549 per gram on a surge in trading volumes from yesterday's 1-week low, but the market held some 4.3% below the 19 May peak for Shanghai's run of new gold price records inside the precious metal's largest consumer nation.
Shanghai silver meantime hit its highest price since Tuesday last week at ¥7743 per kilogram, while London quotes in US Dollar terms erased the last of this week's earlier drop to rise back to $29.50 per Troy ounce.
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"There's still some upward risks to inflation," said Federal Reserve Governor Adriana Kugler on Tuesday, summing up yesterday's raft of 'higher for longer' speeches on US interest rates from Fed officials following last week's 'no change' decision but higher year-end rate forecast.
Gold priced in the Dollar today held just below $2330 per Troy ounce, a new all-time high when reached in early April but 4.9% below the new all-time high of this time last month.

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver, platinum and palladium market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

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