Will China Unleash More Stimulus and Boost Gold Prices?

On Tuesday, China reported GDP growth of 8.9 percent in the last quarter of 2011, which is the slowest growth increase in more than two years.  Although analysts were only expecting growth of 8.7 percent, the slowdown gave investors hope that the world’s second largest economy will inject more stimulus into its economy to fuel growth.  As a result, gold jumped $24 to climb above $1,650 per ounce, while silver surged 60 cents to settle above $30 per ounce.  However, investors should reign in expectations of more stimulus being unleashed in China during the early part of 2012.

The last time China experienced a significant slowdown was towards the end of 2008.  Over the next two years, China provided four trillion yuan ($586 billion) in stimulus money to boost growth.  While investors may be expecting another replay of stimulus, China is indicating that the current slowdown is not significant enough, and inflation is still a concern.  On Wednesday, the China Securities Journal said the nation has no reason to slash interest rates in the first quarter of 2012, because real interest rates remain negative.  The journal explains, “Any change in China’s interest rates will come at a more appropriate time window, when inflation eases further and when economic growth slows down further.”

Investor Insight: Global Factors Boost Gold and Silver Demand.

The inflation rate in China was last reported at 4.1 percent in December 2011.  Inflation hit a three-year peak of 6.5 percent last July, and averaged 5.4 percent over the course of 2011.  The official inflation target in China for 2011 was 4 percent.  XE, a leader in foreign currency research and tools, explains …

“One year deposit rates, meanwhile, are set at 3.5 percent, leaving a negative real interest rate of 0.6 percent. Many economists believe China will not move to cut lending rates while inflation remains above deposit rates.”  The China Securities Journal also notes that monetary policy in China would be conducted in the open-market operations and required reserve ratio adjustments instead of further interest rate cuts.

Despite predictions of a Chinese hard landing, the most recent GDP data eases these concerns, at least in the short-term.  Although China may not provide more monetary easing through rate cuts, the nation avoiding a hard landing is bullish for precious metals and commodities.  The latest GDP numbers not only sent gold and silver higher, but also oil and copper.  On Tuesday, crude oil prices climbed back above $100 per barrel, as copper prices hit their highest level since September.

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Instead of speculating on Chinese stimulus programs, investors should take notice that other trends in the precious metal bull market are gaining strength.  According to the latest GFMS annual survey, central banks increased net purchases by fivefold to 430 tons in 2011, and may purchase another 190 tons in the first half of 2012.  Last year’s net purchases of gold by central banks was the highest level recorded since 1964.  In 2010, net purchases only equaled 77 tons.  “Attitudes among central banks haven’t really changed,” Thomson Reuters GFMS annual survey said. “There’s still that desire to come into the gold market to diversify some of the assets away from foreign exchange and to boost gold holdings.”  As demand increases for physical gold and silver, precious metal prices will receive support and climb higher.  The GFMS annual gold survey also predicts that gold prices will make a push towards $2,000 per ounce in the second half of 2012.

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To contact the reporter on this story: Eric McWhinnie at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com