Bargain buyers sparked demand in the gold benchmark cash contracts on the Shanghai Gold Exchange to a 10-week high. The sharp decline in sport prices after the taper decision by the Federal Reserve took volume of bullion higher to 19,775 kilograms.
Once again, rallies in gold is sparked is sparked out of Asia. James Steel, analyst from HSBC Securities Inc., believes that this could create a rally as it has before. “Price-sensitive buyers came in heavily last time gold fell to $1,200,” said Steel.
China has overtaken India as the largest buyer, but the whole region has been increasing their inventories over the last year. The Chinese have bought gold via jewelry and bars as institutions sell exchange-traded products (ETPs). “Quite a number of investors in China have been waiting in the wings for a bargain-hunting opportunity,” said Liu Xu, senior analyst at Capital Futures Co.
The World Gold Council estimates that China has purchased roughly 1,000 metric tons this year. Shipments to China from Hong Kong rose to 955.9 tons.
This demand also comes as lending rates surge on another cash crunch. The seven-day repo-rate jumped 100 bps to 7.60 percent sparking concerns as the People’s Bank of China (PBOC) injected 200 billion yuan into the markets. According to the National Interbank Funding Center, the same repo-rate jumped 328 bps this week alone, the most since January 2011.
This is in the wake of the Chinese government loosening control and allowing the market to determine interest rates and the previous reduction in cash injections into open-market operations. Zhang Zhiwei, economist at Nomura Holdings Inc., wrote that China’s “highly leveraged and vulnerable” financial system is causing the spikes in rates. Zhang said “the fragile nature of the financial system remains a challenge for the central bank and poses a threat to the economy” and expected defaults next year by local government financing vehicles and non-financial institutions.