Gold prices barely register Chinese bargain-hunting

By Qin Tao Source:Global Times Published: 2013-5-5 22:43:01


Consumers buy gold products in a store in Nanjing, capital of East China’s Jiangsu Province Tuesday. Photo: CFP
Consumers buy gold products in a store in Nanjing, capital of East China’s Jiangsu Province Tuesday. Photo: CFP

When gold prices snapped their historic nosedive several weeks ago with an equally momentous rebound, it didn't take market watchers long to identify the supposed force behind the bounce-back: Chinese moms.

As many will remember, international gold prices fell over 13 percent on April 14 and 15, the biggest tumble for the precious metal since 1983. As prices were plummeting, Wall Street hedge fund managers began aggressively shorting gold in order to profit from its slipping market value.

Few of these executives probably realized though that news of gold's decline would send millions of mothers across China scrambling to snatch up the yellow metal, which is commonly gifted to brides and babies.

Indeed, retail gold sales tripled in China on April 15 and 16, according to figures from the China Gold Association, with value-hungry local moms accounting for most of the turnover. Between April 15 and 25, an estimated 300 tons of gold had been sold in the country, and many were quick to draw a causal connection between the buying frenzy and the reversal in global gold prices which accompanied this period.

But despite these results, I don't think it's wise to conclude that China's physical gold buyers alone have disrupted foreign financial gurus' plans to short gold. Such attention-grabbing claims will only mislead smaller gold investors if taken too much to heart.

It's important to keep in mind that almost all of the Chinese-moms-turned-gold-bugs who swung into action last month were buying gold products in jewelry shops and other retail locations where prices were little swayed by developments in the financial market. Short sellers on Wall Street however were dealing in millions of dollars worth gold derivatives. All in all, the pricing of gold futures contracts is influenced primarily by transaction volumes and the complex interplay of various factors in the global market - such as inflation, GDP growth rates, outlooks on other asset classes and the strength of international currencies. Compared to these indicators, retail consumption is largely an afterthought for most big-time gold traders and investors.

Recent economic history offers abundant support for these well-established notions.

Up until the onset of the 2008 financial crisis, gold prices remained relatively low as the strength of the US economy propped up the dollar. Subsequent years marked by easing monetary policies in the US and a loss of confidence in the dollar pushed investors toward gold, a safe haven asset during periods of economic uncertainty. But as the US and other developed economies climbed back toward recovery, gold's price run-up was destined to conclude sooner or later as investors moved back toward riskier assets. At almost no time though during the past five years has consumer demand been seen steering gold prices.

Sure, we've all read about the explosive rise of China as a consumer society as well as the purchasing power of its emerging upper- and middle-classes, but the evidence is just not there to support claims that local buyers have overwhelmed Wall Street managers in directing gold prices. There is, however, ample evidence to suggest that the yellow metal is still, as it's always been historically, a bellwether of economic conditions and the health of the global financial system.

The author is an economic commentator.

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