2012-05-31

China's gold bubble bursts, but yuan may help

This is some follow up data to the news that Chinese speculators exited the gold market. (See previous post: China's gold bubble)

Hong Kong Gold Trading In Yuan Drops 78% From January Record
“Members aren’t willing to supply gold for physical delivery when gold prices are low,” Cheung said. “Goldsmiths are getting less renminbi because sales have slowed down. They might opt to deposit the yuan at banks instead of buying gold.”

...The society is in talks with refiners in the Middle East, Switzerland and the U.S. to boost the supply of gold available for trading in yuan, Cheung said. The yuan-denominated gold contract is part of Hong Kong’s efforts to cement its status as China’s major offshore yuan trading hub as London gears up to compete. Hong Kong Exchanges and Clearing Ltd. (388) plans during the next quarter to introduce yuan futures contracts that will be settled in the currency.

Yuan deposits in the former British colony fell for a fourth consecutive month in March to the lowest level since June as predictions for appreciation were reined in. Analysts forecast a 2012 gain of 1.8 percent now, a percentage point less than at the start of the year, based on the median estimates in Bloomberg surveys.
This flies in the face of common "wisdom" that says Chinese investors always buy at the bottom. Instead, they succumb to the same herd mentality as everyone else.

Although Chinese speculators have pulled back, their chances of getting back in have increased thanks to yuan contracts and a weaker yuan. If the yuan/dollar depreciation exceeds gold/dollar depreciation, the renminbi price will rise and buyers may start coming back, putting a bid on gold, which is why it will pay to watch the renminbi price of gold from here on out.

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