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Falling Silver and Strong Gold Signal Chinese Economic Slowdown

Commodities / Gold and Silver 2010 Nov 26, 2010 - 08:15 AM GMT

By: Adrian_Ash


THE PRICE OF GOLD fell hard against the US Dollar in London on Friday, unwinding the last of this week's earlier 2.1% gain as global stock markets and industrial commodities fell across the board.

The silver price dropped 3% from the start of Friday's "thin and quiet" trading in Asia, as one Hong Kong broker described it.

Gold priced in Australian Dollars hit a fresh 4-month high, however, as the "commodity currency" fell hard on the forex market.

Priced in Euros, physical gold bullion held onto this week's 3.3% jump, as Spanish government bonds bucked a rise in Greek and Irish debt, falling in price and pushing the 10-year yield to a Euro-record above comparable German Bunds.

"There's no way back from the Euro," declared German central-bank chief Axel Weber this week. A break-up of the 16-nation currency union is "inconceivable" said another senior Eurozone official on Thursday – it's "unthinkable" says a leading Washington think tank.

"You would see the European Central Bank printing €500 notes and dropping them from helicopters before Spain was forced to default," Peter Institute fellow Jacob Funk Kirkegaard said to Reuters today.

Fears of slower Chinese growth, meantime – sparked by tighter monetary policy in the world's fastest-growing economy – "could become increasingly important for the relationship between gold prices and more productive commodities such as oil or copper," says Patrick Artus' research team at French bank and London bullion dealer Natixis.

Gold bullion prices this week pushed up to equal almost 17 barrels of US crude oil – "the highest levels since the first quarter of 2009," says Natixis.

"The market is reflecting a heightened risk of an industrial slowdown."

"[The US Fed's] indulgence in Quantitative Easing might just be about to run into [Beijing's] switch to Quantitative Tightening," agrees Diapason Commodities' Sean Corrigan.

"We know which we think will carry more weight in setting commodity prices."

In China today, an auction of 3-month government debt failed to find enough bidders after Beijing raised banking reserve ratios again last week – forcing banks to keep back a larger proportion of depositors' funds.

"The demand for short-term bills is pretty weak due to tighter cash availability", reckons Guotai analyst Jiang Chao in Shanghai, speaking to Bloomberg.

So-called "quantitative tightening" – curbing the supply of credit – is preferable in fighting China's inflation to raising interest rates, says the FT's Alpha blog. Because "it avoids encouraging hot money inflows into the region," especially as zero rates and quantitative easing in the United States force capital to seek a decent return elsewhere.

But Beijing is "paying the price for this reluctance in the form of uncomfortably high inflation," warns RBC Capital Markets, risking a much sharper rise in rates when forced.

Real Chinese lending rates – after a sharp rise in inflation – now stand at barely 1%. Real returns to cash depositors are negative by more than two percentage points.

The world's No.1 gold mining producer, China is also the No.2 gold consumer, accounting for 16% of global demand in the third quarter with Chinese households doubling to nearly 2% the amount of their fast-growing annual savings they put into gold.

"I am not sure raising rates will reduce inflation at all," says Peking University professor Michael Pettis. "On the contrary, in China they may actually increase inflation [because] the vast bulk of Chinese savings is in the form of bank deposits.

"Raising the deposit rate is like reducing taxes...By raising disposable household income, it will actually raise household consumption."

By Adrian Ash

Gold price chart, no delay   |   Buy gold online at live prices

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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