Gold Flows to China Rise Sharply

From Adrian Ash

BullionVault

(and Early) Ahead of New Year as Savers Reject Negative Bank Interest Rates

WHOLESALE PRICES for gold 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 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 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.

“Policy makers should allow more flexibility of the Yuan to help ease imported inflation,” the People’s Daily today quotes politburo researcher Ba Shusong, who forecasts a possible 6% rise in consumer prices year-on-year in 2011, but says that raising interest rates to combat inflation would only invite capital inflows from overseas.

“Reserve requirements for lenders and central bank bill sales may be better tools for controlling inflation than interest rates,” says Ba.

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 immediately or invest their money outside deposit accounts according to a new survey conducted by central bank the People’s Bank of China.

Less than 38% of the 20,000 households surveyed across 50 cities said they are now willing to deposit money in banks, down from well over 43% three months before.
Meantime in Washington today, the International Monetary Fund said it has completed the gold bullion sales program begun in Oct. 2009.

Some 57% of the 403-tonne total was bought directly by central banks, 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.

Adrian Ash

BullionVault

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Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the mining-sector’s World Gold Council research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

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