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Gold Falls on China Rate Tightening

Commodities / Gold and Silver 2010 Jan 12, 2010 - 06:43 AM GMT

By: Adrian_Ash


Best Financial Markets Analysis ArticleTHE PRICE OF GOLD fell early Tuesday in London dealing, dropping below $1148 an ounce as commodity prices and equities fell after China's central bank reduced credit supplies in the world's fastest-growing economy.

The gold price gave back half of Monday's 2.1% jump agains the Dollar after the People's Bank raised its yield on 1-year bills by 0.08% – twice the expected rise – and withdrew a one-day record worth $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] 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 physical gold 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.

Gold priced 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."

By Adrian Ash

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2010

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

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