China's Banks "On the Bid" to Buy Gold

CHINESE BANKS are moving to Buy Gold ahead of the Lunar New Year according to traders and bank officials, pushing the premium over international prices higher in anticipation of strong consumer demand.

Falling on 23rd January in 2012, and kicking off a week of national holidays, the Chinese New Year is traditionally deemed an "auspicious" time to Buy Gold. Whether as jewelry or for investment, private household demand has leapt more than 7-fold in Dollar value terms since deregulation began a decade ago.

"We are seeing Chinese banks on the bid ahead of the Chinese New Year," Reuters quotes a trader in Singapore today.

"The high premium in Shanghai is caused by the seasonal demand ahead of the Lunar New Year," says a bank official in the city.

January 2011 saw premiums on Gold Bullion paid over and above the international spot price – benchmarked as the price of wholesale gold delivered in London – to some $3 per ounce.

According to data compiled for market-development association the World Gold Council, private-sector demand to Buy Gold rose 47% in mainland China over the first 3 months of last year compared with the same period of 2010.

"The Lunar New Year demand this year may not be as good as last year," says Hou Xinqiang, analyst in Shenzen for Jinrui Futures, speaking to Reuters.

"Liquidity is the main problem – this time last year liquidity was abundant and now it has been tightened quite a bit, for both businesses and households."

Seeking to restrain credit growth in the world's fastest-growing major economy, the People's Bank of China raised the reserve ratio requirement for commercial banks six times in 2011, forcing lenders to keep back a greater portion of the money they took in from savers.

However, the PBoC cut the ratio for the first time in 3 years in December. In the first week of January 2012, it then delayed implementation of tougher lending criteria until at least July.

With inflation rising but "real estate and equity markets largely off-limits" thanks to government policy aimed at capping speculative bubbles, "precious metals gained in focus" for Chinese savers in 2011, says the latest commodities market analysis from French bullion bank Natixis.

Real interest rates, after allowing for inflation, remain sharply negative on Chinese bank deposits, encouraging people to Buy Gold and other tightly supplied hard assets as an inflation hedge.

"Even as inflation begins to subside," says Natixis, "it may be some time before real interest rates become positive and China’s private sector investors are encouraged to move away from precious metals."

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