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What for Gold when China Targets Slower Growth and Greek Default Gets Triggered

Gold April futures fell 3.8% last week, the second biggest drop since the 6.9% decline in the week of 16 December amidst speculative selling and market disappointment of no imminent QE3 from the U.S. Fed. However sentiment has been high evidenced by gold-backed ETF holdings rising to a record 2,405.2 tons and the funds/traders raising futures and options contracts to 197,522 in CFTC last week, according to Bloomberg.

Gold sentiment got further dampened with China announcing a lower GDP growth target for 2012 at 7.5% (compared to 8% since 2004) on Monday. Prices can get further jolted when Greece’s private-sector debt swap results come out at the end of 8 March. As of Monday, the 66% acceptance threshold still looks difficult to reach which would trigger CACs and possibly Greece’s default.

Some economists pointed out China’s real GDP may still reach 8% this year though the message is clear that excessive credit expansion and stimulus cannot be expected. Nevertheless, commodities demand from China is still huge even though GDP growth slows. Chinese appetite for gold at 191 tonnes surged past India’s in Q4 2011. Asian jewellery makers allegedly supported gold below $1,710 last week.

Though no one can predict if Greek will default, uncertainties in debt restructurings and the European peripheral countries’ possible exit from the Eurozone should support investors’ demand for real assets such as gold. According to World Gold Council, Germany and Switzerland drove European gold demand in 2011.

Traders warn that a correction below $1,600/oz and a firm support at $1,560 are likely based on a channel connecting the trough in price in 2008 to present. Yet resistance is strong at $1,880.

We would agree with Marc Faber who said that gold is not in a bubble because very few people (estimated less than 5%) own gold. We also said before supply of gold is constrained yet demand remains strong from the growing countries. We cannot predict the future but we can take advantage of the discount from time to time.

Sharps Pixley, London

06 Mar 2012 | Categories: Gold, China

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