Gold factors in developing Chinese demand

After jumping 3.32% last week, the U.S. Comex gold futures traded between $1,717.60 and $1,738 and ended at $1,724.80 on Tuesday, down 0.35% from Friday. The S&P 500 index fell a further 0.39% this week after dropping 2.43% last week while the Euro Stoxx 50 index recovered 0.54% this week after falling 2.64% last week. The Dollar Index has been hovering around 81 in the past four days. The VIX index fell from 18.61 last Friday to 16.65 on Tuesday.

Last week, China reported better-than-expected exports growth, industrial production data and fixed asset investment growth while the reported inflation data was lower than expected, fuelling hopes of recovery without higher inflation. As the new Chinese leaders will be confirmed on Nov. 14, the market will focus on how well the new administration can carry out the structural reforms to rebalance and further liberalize the economy.

In Hong Kong, where the annual London Bullion Market Association (LBMA) conference took place on Nov. 12-13, many eyes were on Chinese gold demand and trading. According to the World Gold Council, China's gold demand has risen 27% per year since 2007 and China's world share has doubled from 10% to 21% from 2007 to 2011. Nevertheless, its gold reserves as a percentage of total reserves were only 2% as of 2009 compared to over 70% in the developed countries. To further enhance trading, the Shanghai and Shenzhen Stock Exchanges will soon launch gold ETFs while the Shanghai Gold Exchange will have an interbank market in early December which will also be open to foreign banks.

According to the LBMA survey, gold price will rise to $1,849 by next September. Market participants generally expect gold to trade within a range of $1,800 to $2,000 in 2013. The rise in gold price is supported by harder and harder gold discoveries according to Barrick Gold's CEO. Barclays predicts gold production to rise by less than 1% in 2013.

In Europe, the Finance Ministers have agreed to postpone by two years to 2022 for Greece to reach its target debt to GDP ratio of 120 percent although the IMF disagreed with the delay. Greece needs to borrow an extra €32.6 billion which will further threaten its debt sustainability.

The uncertainty toward Greece, the U.S. fiscal cliff and Wednesday's FOMC minutes release would certainly be catalysts for gold prices.

About the Author
Austin Kiddle

Austin Kiddle is a director of the London-based gold broker Sharps Pixley Ltd.

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