Gold News

Gold Prices Reverse "China Jump" on "China Tightening" But Low US Rates to "Support Gold Investment" in 2010

Gold Prices slipped early in London on Tuesday, dropping below $1148 an ounce as commodity prices fell and European stocks lost almost 1% after China's central bank moved to reduce credit supplies in the world's fastest-growing economy.

The Gold Price gave back half of yesterday's 2.1% jump vs. the Dollar after the People's Bank raised its yield on 1-year bills by 0.08% – twice the increase expected – and withdrew a one-day record equal to $29 billion in cash from the Chinese bond market.

"Today's steps do not mean an imminent rate hike," said one Shanghai trader to Reuters, but "The central bank has stepped up its draining of liquidity even more strongly than the market had expected," said another.

"The central bank will still fine-tune [policy] or hike banks' reserve requirement ratios after the Lunar New Year" – traditionally China's peak season for Buying Gold – on Feb. 14th.

Copper prices fell early Tuesday after rising 12% in Shanghai over the last month. Crude oil slipped below $82 per barrel.

Ten-year UK gilt yields were pushed further below 4.0% per year as Western government bond prices rose.

"For a continued high Gold Price, China's...accelerating interest in [private] Gold Investment must continue, as must the bogeyman of an inflation threat after the [global] government stimulus package," says Sweden's Raw Materials Group in its 2010 outlook.

Forecasting a 20% rise in copper and 30% gains in zinc prices, the Stockholm consultancy says the Gold Price will add 5-10% this year, averaging $1050 an ounce.

China became the world's No.1 private consumer of Gold Bullion in 2009, while net demand from India – the No.1 market since deregulation in 1992 – dropped to mid-1990s levels. (Get the full story on China's 2010 Gold Rush here...)

"The three most important factors driving Gold Prices are now behind us," says RMG. "The fall in the Dollar looks to be over for the time being; the flight to safety ended as risk appetite returned after the financial crisis; falling mine production turned to show an increase in 2009 for the first year since 2001."

"Gold Investment demand in 2010 will be well supported by low to negative real interest rates," counters Philip Klapwijk of London's GFMS consultancy in his 2010 forecast, "as policymakers react to the threat of a 'double dip' recession by maintaining ultra-loose fiscal and monetary policies.

"The weight of money entering the market from non-traditional investors should help gold rise above the $1300 threshold," says Klapwijk – winner for the third time last year in the London Bullion Market Association's poll of 20 analysts' price forecasts.

"At that level, we would expect collapsing jewelry demand and higher [gold] scrap supply to help put a brake on things."

"Even China, which has helped drag the world economy back to recovery, will be affected by loose US monetary policy," says a note from Switzerland's MKS refiners, "due to its fixed exchange rate with the USD 'importing' American liquidity, which could lead to asset bubbles and hyper inflation.

"In this context, gold ought to benefit from the incertitude."

Following Monday's sharp jump in oil, base-metal and Gold Prices on news of record import growth to China, "China's support for the global economy does not really come from its imports," says Standard Bank's chief currency strategist Steven Barrow today, "even if they did rise an annual 55.9% in December.

"Instead, the main support comes from [China's] accumulation of reserves, which look set to top $2.4 trillion according to estimates for December’s total.

"Despite diversification most of these reserves probably still find their way into government bonds and that’s helping to stop any significant rise in yields...[That] is of considerable support to the global economy, and especially to the US."

Early in Asian trade on Tuesday, an initial dip in Gold Prices met solid buying, one Hong Kong dealer reports, as "the market quickly realized that at those prices sellers were scant.

"Short-covering ensued."

The US Dollar meantime held flat overall on the currency markets, slipping against the Yen and British Pound but ticking higher vs. the Euro.

The Gold Price in Euros still reversed Monday's 1.4% rise to trade near €792 an ounce.

British investors wanting to Buy Gold today saw the price fall 1.3% from near-6 week highs as Sterling rose on news of a lower-than-expected UK trade deficit, plus a year-on-year rise in house prices for November.

Silver meanwhile fell back to last week's closing level of $18.50 an ounce, capping six sessions of strong gains.

"Silver will benefit this year both from gold's expected advance and a decent improvement in industrial demand from 2009's very low base," says Philip Klapwijk at GFMS.

"Indeed, brighter prospects for [silver industrial demand] will encourage investors into thinking that a solid breach of the $20 level is on the cards this year, something which would seem very plausible."

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Adrian Ash

Adrian Ash, BullionVault Gold News

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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