Gold and Risky Assets Sag as China Slowdown Fear Takes Over
On Tuesday, broader market indices and commodities both fell as markets react to a common factor: China slowdown. S&P fell 0.3% while the Euro Stoxx fell 1.2% after reaching this year’s high of 12.6% and 13.1% on Monday. The CRB Commodity index also fell 1.2%. After Premier Wen declared a GDP growth target of 7.5% last week, the Chinese government announced a hike of 7 to 7.8% in retail gasoline and diesel prices, the second price increase since 8 February and the largest price increase in 2 years. The China Association of Automobile’s Deputy General also commented that China would likely miss the 8 percent target growth of auto sales this year due to escalating fuel costs and economic slowdown. The President of Iron Ore at BHP Billiton spooked the market further with his comment that steel growth in China has already flattened as China is gradually shifting its growth model from infrastructure building to consumption.
Fear of China slowdown hits the precious metals complex on Tuesday. Comex April gold futures fell 1.2% to $1,647 on Tuesday, or -0.5% for the week, after declining 3.2% last week, prompted by no QE3 from the U.S. Fed. Traders worry that China’s slower growth would also lower demand for the bullion as China is expected to displace India as the world’s largest consumer in gold in 2012. Physical demand for gold could wane as Indian gold jewellers put on a 3-day nationwide strike against government’s proposal to double import duty from 2% to 4% on gold and platinum. The Bombay Bullion Association warned that Indian gold purchase could plunge 35% in 2012.
Dollar strength due to improving US economic momentum and rising bond yields, an increase of 40bp month-to-date, has further hurt gold price as investors move away from gold to other risky assets. U.S. housing starts stayed near a three-year high at 689,000 annual rate in February while permits increased to a 717,000 annual rate.
We believe gold is currently in a "Goldilocks" scenario - neither too hot nor too cold. As Asia opens on Wednesday, gold has climbed beyond $1,650. While short-term negative factors abound, we shall keep our eyes on gold's support from the buy-and-hold type of investors such as those in emerging countries with rising wealth or those who want to hedge against a fat-tail event.
Sharps Pixley, London