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Gold Ignores Indian Tax Hike, Rises Because of China

Commodities / Gold and Silver 2012 Jan 17, 2012 - 11:20 AM GMT

By: Adrian_Ash


Best Financial Markets Analysis ArticleThe WHOLESALE MARKET gold price reached new 5-week highs as Asian trade ended and London opened on Tuesday, while global stock markets and commodity prices also rose after stronger-than-expected growth data from China.

The world's second-largest economy, China reported annual growth of 8.9% for the end of 2011 – the weakest level since mid-2009 but stronger than analysts forecast and almost 5 times the pace of US growth at last count.

The Shanghai Composite stock index jumped 4.2%. Copper led base metal prices by rising 2.6%.

Silver bullion re-touched last week's 2-month high above $30.50 per ounce, despite news of a sharp hike in Indian import duty which also affects gold.

The gold price peaked on Tuesday mornng at $1667 per ounce, more than 9.4% above the 5-month low touched in late December.

US crude oil contracts jumped back to $100 per barrel after Saudi oil minister Ali al-Naimi said the Opec-cartel member is now targeting that level – "a new line in the sand" substantially above the previous "fair price" of $75 according to Standard Bank today.

"Gold price action is becoming increasingly indifferent to physical trade and far more susceptible to broader market headwinds," says a note from Japanese conglomerate Mitsui's London team today.

"Everything is rising because of China," says one commodities analyst in Frankfurt to Bloomberg. "It's general market sentiment."

"Simply put," reckons China economist Ting Lu at Bank of America/Merrill Lynch in Hong Kong, "Beijing will continue its policy easing which was started in mid-October, though we should not expect a big-bang stimulus."

Beijing cut the required reserve ratio which banks must keep back from lending for the first time in three years last November, easing it back half-a-percentage point from a record 21.5%.

Analysts now expect a further two percentage-point cut in 2012, reports Reuters, "with many banking on one in the run-up to next week's Lunar New Year holiday."

"In terms of calendar year 2011, [gold demand from] India was ahead," says Philip Newman, research director at Thomson Reuters GFMS, presenting the consultancy's latest global data in London today but it does seem as though China, in terms of our data for the first half [of 2012], may just tip it."

GFMS now forecasts a gold price peak of $2000 per ounce, sometime in 2012.

China's domestic gold mining output – the world's No.1, and currently subject to an export ban – rose sharply in December to end 2011 some 19% higher than 2010 at 731 tonnes, according to the National Bureau of Statistics today.

Across in India – the world's hungriest gold consumer – the government today raised import duties on silver to 6% by value, and raised the duty on gold from 300 Rupees per 10 grams to a value tax of 2%.

That doubles the effective tax rate on gold, first deregulated as India moved away from a command economy in the early 1990s.

The gold price on the Multi Commodity Exchange (MCX) today rose almost 1% to INR27,760 per 10 grams, while shares in leading jewelry chains shed some 3%.

Over the last 12 months, the plunge in the Indian Rupee's forex value has made the gold price rise over 10% higher than it otherwise would. Annual imports to India – which has no domestic gold mining output – declined by 9% from 2010's record level, according to the Bombay Bullion Association.

Meantime in Europe on Tuesday, several governments including Greece and also the cross-border Stability Fund – downgraded from its "triple-A" credit rating on Monday by Standard & Poor's – raised almost €11 billion in short-term bills, and at lower interest rates than last time of asking.

The Euro rallied 1.5¢ from last week's 17-month low near $1.26.

The gold price rose faster, however, nudging cost of gold to Eurozone buyers above €1300 for only the second time since 8th December.

"Spot gold in Euros is about to touch the November peak at €1316.48 [per ounce]," reckons Axel Rudolph, technical analyst at Commerzbank.

"Should this level be surpassed a swift acceleration higher towards last year's all-time high at €1359 should be seen."

New data released Tuesday showed the pace of consumer-price inflation slowing last month across the European Union – the largest single export market for China.

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 2012

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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