China Growth and U.S. Inflation: Pretext to Sell Gold
After reaching a recent peak of $1,331.40 on 14 April, the U.S. Comex
gold futures have declined to $1,300.30 on Tuesday, a plunge of 2.05% on
the day. Gold’s 200-day moving average was also breached, which has
likely accelerated the stop-loss orders. Gold is also less supported
technically as the managed gold short positions were recently down to
the lowest level since December 2012. The S&P 500 Index and the
Dollar Index rose 1.50% and 0.44% respectively while the Euro Stoxx 50
index dropped 0.69% in the past two days. The U.S. ten-year government
bond yield is steady on Tuesday at 2.6283% despite a faster rate of
increase of U.S. inflation in March.
China Data Led the Gold Sell-off
More evidences of China slowdown came when China reported that the March
M2 growth has slowed to 12.1%, below the central bank’s target of 13%.
The aggregate social financing in Q1 has also dropped 9.3% compared to
Q1 last year although during the month of March the gauge has risen
120%. China’s Q1 growth slowed to 7.4% compared to the expected 7.3%
and 7.7% in Q4. In the U.S., the March Advance Retail Sales jumped more
than expected by 1.1% compared to 0.3% in February. The CPI and the
core inflation, led by food and rent, rose more than anticipated by 0.2%
in March. CPI rose 1.5% year-on-year, faster than February’s yearly
rate of 1.1%. Rising inflation removes the fear that the U.S. is
falling into deflation and allows the Fed to continue to taper.
Physical Demand Trend
While the market has focused on China’s slowdown and her smaller
appetite to take up gold so far this year compared to last year, the
Chinese demand for gold will likely rise by 19% by 2017 according to the
World Gold Council (WGC). China has become the world’s largest
consumer of gold last year and is currently consuming around 1,130
tonnes of gold. However, the Chinese gold demand will likely be flat in
2014 while the gold-backed financing will decline as the central bank
reins in the credit and trust loans growth. The WGC pointed out that
the Chinese bank savings amount to US$7.5 trillion but only about $300bn
is allocated to gold, signifying the potential for gold demand to grow
as Chinese wealth climbs.