Gold News

Gold Bullion Flows to China Jump as New Year 2011 Draws Near, Central Bank Buying Marks "Sea Change" as IMF Sales End

Gold Bullion prices moved sideways around $1390 per ounce in London on Wednesday morning, little changed as world stock markets also held flat but crude oil crept above $90 per barrel.

Silver Bullion traded in 1000-ounce wholesale bars continued to hold inside this week's tight range below $29.50 per ounce.

A senior bullion logistics executive in Switzerland yesterday told
BullionVault that shipments of Gold Bullion to China are running much
higher – and have begun much earlier – to meet consumer demand for the
Chinese New Year, which will start on 3rd Feb. 2011.



The International Monetary Fund said it has completed the 403-tonne sale of Gold Bullion begun in Oct. 2009, with some 57% going to central-bank buyers led by India.

"Outside of the IMF sales, little other [central-bank] selling has materialized," notes Barclays Capital's Suki Cooper in an email, pointing to the near-zero Gold Bullion sales from Europe's major central banks since the global financial crisis began in 2007.

"Gold's price reaction was muted in response to the news [today], but in the absence of the IMF sales, the [official] sector is set to swing into a net buyer of gold," says Cooper.

"What the sale does represent is a sea change in gold demand if current patterns continue," says Lawrence Williams at MineWeb.

"A number of central banks have been quietly, or overtly, increasing their gold holdings, in part [because of] the huge increases in money supply generated by Quantitative Easing programmes" in the West.

"The liquidity pumped out by central banks means that there is a lot of money sloshing around that needs to find a home," says Citigroup analyst David Thurtell, quoted by the UK's Independent and pointing to Gold Investment as a clear beneficiary.

"Interest rates remain very, very low and are probably not likely to rise for some time...So the opportunity cost of investing in gold is very low."

The US Federal Reserve will start raising its key lending rate in mid-2011 according to the interest-rate futures market, says a recent paper from the Atlanta Fed.

But "If you apply any kind of simple Taylor rule [regarding the apparent trade-off between interest rates and employment] to even the optimistic forecasts I'm seeing," says Nobel-winning economist (and former colleague of Ben Bernanke's at Princeton University) Paul Krugman, writing in his New York Times blog, "it implies zero rates through to the end of 2012 and beyond."

"In our view, QE2 – the Fed's second quantitative easing move – is only the beginning and the fear of future inflation will continue to drive Gold Investment demand higher and for longer," says a note from US financial planners and brokerage Raymond James Ltd, quoted by the Globe & Mail.

RBC Dominion Securities, also in Toronto, sees Gold Prices perhaps hitting US$1500 early in 2011, and averaging $1400 until end-2012.

Chart-watching technical analysts at Barclays Capital in London believe the next short-term Gold Price peak could be $1480 an ounce, says Bloomberg News.

Meantime in China, and even with Chinese consumer prices rising perhaps 6% year-on-year in early 2011, raising interest rates to combat inflation would only invite capital inflows from overseas, putting pressure on China's banking sector, says politburo researcher Ba Shusong, quoted by the People's Daily.

"Policy makers should allow more flexibility of the Yuan to help ease imported inflation," the official newspaper quotes Ba. "Reserve requirements for lenders and central bank bill sales may be better tools for controlling inflation than interest rates."

Cash deposits – which currently account for the lion's share of China's massive household savings – now pay 2.25% per year, only half the latest rate of inflation.

Consumers are increasingly choosing to spend or invest their money outside deposit accounts, says a new survey conducted by Beijing's central bank, the People's Bank of China.

Only 37.6% of the 20,000 households surveyed across 50 cities said they are now willing to deposit money in banks, down from 43.6% three months before.

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Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum 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.

See the full archive of Adrian Ash articles on GoldNews.

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