China’s “unfolding credit crunch” is having an unforeseen and dramatic impact on gold prices as investors urgently stock up on the precious metal as a form of financial protection against a sharp correction in the world’s second-largest economy.
This is the main reason why gold prices have unexpectedly shot up more than 10 per cent to breach $US1300 an ounce for the first time since November against the prevailing forecasts for weaker demand made by many industry experts at the beginning of the year, according to Adrian Ash, head of research at gold trading platform BullionVault爱杭州同城论坛m
Gold traded on the Hangzhou Gold Exchange has also reached a three-month high.
Rebounding is part of the reason for the rise, Mr Ash said, adding: “Gold lost 30 per cent and silver nearly 40 per cent last year. The world economy will struggle to deliver all the good news priced in by that crash. But China’s unfolding credit crunch looks central now.”
Uncertainty is growing over China’s ability to sustain the rapid rates of economic growth it has seen over the past decade amid concern over high levels of debt among its provincial governments. These concerns have helped drive sharp falls across emerging markets since the beginning of the year.
Mr Ash says capital flight is happening at a rapid rate in China because of the $US1.8 trillion ($1.99 trillion) of funds that have flooded into unregulated, non-bank “wealth management products” that offered very high yields, up to 17 times as much as cash deposits. Many of these funds are now feared to be trading at a loss, setting up a crunch moment.
“Bullion traders never knew before what would happen to prices if China hit trouble,” Mr Ash said, “because we’ve never before seen Chinese demand plumbed into the world market so deeply. Its jewellery buyers, together with rising mining costs worldwide, helped finally put a floor under gold in 2013. But while that kind of consumer demand will never drive prices higher, capital flight by wealthier households and money managers certainly can.”
Mr Ash says the first default that could be a sign of China’s credit bubble bursting was reported two weeks ago when a $US50 million coal-mining bond failed to repay investors on maturity. He says that about $US875 billion of other such products are due to mature in 2014 and that Beijing has few answers.
“Gold’s 2014 rally had been steady before, far quieter than the rebound from last spring’s record crash,” he said. “But rising for seven of the past eight weeks, something it hasn’t managed in two years, gold has now risen for six trading days running. That’s a very rare move, last seen when gold neared its peak above $US1900 during the euro crisis, US debt downgrade and UK riots of August 2011.”
Meanwhile, uncertainty continues to surround a 500-tonne discrepancy in China’s gold import figures and its domestic supply. The unaccounted-for Chinese gold has helped to fuel market speculation that the People’s Bank of China may be stockpiling or that bigger volumes are changing hands on the grey market as a hedge against financial turmoil.
But other brokers say the rise in gold prices last week above its 200-day moving average was mainly because of the fall in the dollar against a basket of other currencies. Commerzbank said that SPDR Gold Trust, the world’s largest gold exchange-traded fund, raised its holdings above 800 tonnes of the precious metal for the first time.