Chinese Gold Buyers Here For The Long Haul

Another painful day for precious metal holders yesterday – with talk of slowing growth in China and Europe still hurting stocks and commodities. The gold price broke decisively below support at $1,650, though – as has proved a common pattern over the years – yesterday’s price drop in New York have been followed today by a slight recovery during Asian trading, though the price still remains just below $1,650. Short-term sentiment on the yellow metal has also been harmed somewhat by talk of new bullion taxes in India hurting demand there (India being the largest consumer market for gold).

Among gold, silver, platinum and palladium, the palladium price was the worst performer yesterday (down 5.5%), hurt by weakening Chinese manufacturing data. HSBC’s China purchasing managers index fell for the fifth month in a row – with more and more people stating that China is in for a “hard landing”. JPMorgan’s chief Asian and emerging market strategist argues that the country already is in a hard landing situation. Falling demand from China’s automobile manufacturers for platinum and palladium – both are used to make catalysts – will keep the pressure on these two metals in the short-term, offering longer-term investors a potentially attractive entry point into these markets.

However, the demand side is only one aspect of precious metal pricing; just as important if not more so is the quality of the currency in which these metals are priced. And on this score, it’s hard to argue with the idea that the Chinese will seek to inflate their way out of trouble – in common with countless other countries throughout history, and in common with what’s going on in Europe, America and Japan now. Chinese industrial demand for metals will fall on a short-term basis, but the government’s efforts to devalue the yuan will likely encourage more Chinese to buy gold, silver, and other metals as means of protecting themselves from inflation.

The song remains the same: there’s only so much precious metal in the world, but a limitless supply of fiat currency.