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.