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China Rate Rises "Boosting Gold Investment"

EFFORTS by China's monetary authorities to moderate the country's housing boom could be encouraging Gold Investment, according to research published by the Chinese office of a major investment bank.

Jing Ulrich, managing director of equities and commodities at JP Morgan China, said Friday that measures aimed at curbing housing prices could be driving the "mass affluent" towards Gold Investment.

"Chinese demand for gold jewelry increased 13.5% in 2010, while demand for bars and coins rose 70.5%," she said in a note. "Most market participants expect that China's gold demand could grow at a still-stronger pace in 2011."

The People's Bank of China raised its benchmark deposit rate to 3.25% earlier this month, the fourth rate rise since October.

However, official inflation figures released Friday show that real interest rates, after inflation, remain negative. Consumer Price Inflation (CPI) was 5.4% in the year to March. GDP figures for the first quarter show that China's economy grew at an estimated 9.7% year-on-year.

Gold market participants believe that inflation fears are a significant reason why many Chinese are Buying Gold, and that tighter monetary policy has far had little impact on demand.

"Generally, higher CPI could still be a boost for gold," said a dealer in Singapore. "If you look at recent price action when China announces interest rate hikes, it hasn't affected commodities that much."

Zhang Yongtao, vice-chairman of the China Gold Association, also sees the desire for protection against rising prices as a motivation for Buying Gold.

"People buy more gold mainly to hedge against inflation," he said last year.

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