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Gold Bullion "Signals Industrial Slowdown" as Spanish Debt Falls, China Tries Quantitative Tightening to Fight Inflation

Gold Bullion fell hard against the US Dollar in London on Friday, unwinding the last of this week's earlier 2.1% gain as global stock markets and industrial commodities fell across the board.

The Silver Price dropped 3% from the start of Friday's "thin and quiet" trading in Asia, as one Hong Kong broker described it.

Gold priced in Australian Dollars hit a fresh 4-month high, however, as the "commodity currency" fell hard on the forex market.

Priced in Euros, physical Gold Bullion held onto this week's 3.3% jump, as Spanish government bonds bucked a rise in Greek and Irish debt, falling in price and pushing the 10-year yield to a Euro-record above comparable German Bunds.

"There's no way back from the Euro," declared German central-bank chief Axel Weber this week. A break-up of the 16-nation currency union is "inconceivable" said another senior Eurozone official on Thursday – it's "unthinkable" says a leading Washington think tank.

"You would see the European Central Bank printing €500 notes and dropping them from helicopters before Spain was forced to default," Peter Institute fellow Jacob Funk Kirkegaard said to Reuters today.

Fears of slower Chinese growth, meantime – sparked by tighter monetary policy in the world's fastest-growing economy – "could become increasingly important for the relationship between Gold Prices and more productive commodities such as oil or copper," says Patrick Artus' research team at French bank and London bullion dealer Natixis.

Gold Bullion prices this week pushed up to equal almost 17 barrels of US crude oil – "the highest levels since the first quarter of 2009," says Natixis.

"The market is reflecting a heightened risk of an industrial slowdown."

"[The US Fed's] indulgence in Quantitative Easing might just be about to run into [Beijing's] switch to Quantitative Tightening," agrees Diapason Commodities' Sean Corrigan.

"We know which we think will carry more weight in setting commodity prices."

In China today, an auction of 3-month government debt failed to find enough bidders after Beijing raised banking reserve ratios again last week – forcing banks to keep back a larger proportion of depositors' funds.

"The demand for short-term bills is pretty weak due to tighter cash availability", reckons Guotai analyst Jiang Chao in Shanghai, speaking to Bloomberg.

So-called "quantitative tightening" – curbing the supply of credit – is preferable in fighting China's inflation to raising interest rates, says the FT's Alpha blog. Because "it avoids encouraging hot money inflows into the region," especially as zero rates and quantitative easing in the United States force capital to seek a decent return elsewhere.

But Beijing is "paying the price for this reluctance in the form of uncomfortably high inflation," warns RBC Capital Markets, risking a much sharper rise in rates when forced.

Real Chinese lending rates – after a sharp rise in inflation – now stand at barely 1%. Real returns to cash depositors are negative by more than two percentage points.

The world's No.1 Gold Mining producer, China is also the No.2 gold consumer, accounting for 16% of global demand in the third quarter with Chinese households doubling to nearly 2% the amount of their fast-growing annual savings they put into gold.

"I am not sure raising rates will reduce inflation at all," says Peking University professor Michael Pettis. "On the contrary, in China they may actually increase inflation [because] the vast bulk of Chinese savings is in the form of bank deposits.

"Raising the deposit rate is like reducing taxes...By raising disposable household income, it will actually raise household consumption."

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Adrian Ash is director of research at BullionVault, the physical gold and silver 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 is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

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