Gold Rebounds As China Vows Market Reforms, US Fed Blamed For Shanghai Rates Spike

The PRICE OF GOLD rose Friday lunchtime in London, regaining last week's closing level of $1288 per ounce as European stock markets turned higher and the US Dollar slipped.

Following new Federal Reserve chief Janet Yellen's "dovish" testimony Thursday, "Market participants who anticipated a premature withdrawal from ultra-expansionary US monetary policy [and] bet on a falling price are forced to close these positions again," says a note from Germany's Commerzbank.

But "Without some pick-up in non-Chinese demand," says London market-maker HSBC, "particularly investment demand, it may difficult for gold to hold rallies, at least in the near term."

Dropping 1.5% for Chinese traders this week, gold on the Shanghai Gold Exchange closed Friday's business at a $7 premium per ounce to the world's benchmark London quote.

That was up from $5 per ounce at the start of this week, but on lower trading volumes.

"Unprecedented changes" will follow Beijing's decision at last week's 3rd plenum to "upgrade" the role of free markets in the world's second largest economy, according to new documents and comments from party officials today.

Beijing has previously cast gold as a central part of China's market reforms, "play[ing] a very important role in the formation of the financial market system," according to Xie Duo, general director of the People's Bank of China, when presenting last year to the LBMA conference in Hong Kong.

China's labor camps will now also be closed, newswires quote sources today, while the "one child policy" in the world's most populous nation will be abolished for the sake of "long-term balanced development".

Back in Friday's action, and as gold slipped in Shanghai, China's interbank lending rates meantime jumped at the fastest pace since June's "credit crunch" spike, adding over one percentage point to the cost of 1-week money, which hit 5.33% as the central bank sold bonds to withdraw liquidity from the money market.

Traders quoted by Reuters said the People's Bank wanted to offset "strong capital inflows into China as the US Federal Reserve continues its quantitative easing (QE) program."

"We're using policies that have never really been tried before," said Fed nominee Janet Yellen yesterday to the Senate Banking Committee, discussing her likely appointment as Fed chair in February 2014.

"It is a work in progress."

Denying that zero rates and money printing had made the Fed “prisoner of the market”, Yellen later said they could both “induce risky behaviour".

Asked by Nevada's Republican Senator Dean Heller what moves the gold market (a repeat of his July question to current Fed chair Ben Bernanke), "It is an asset that people want to hold when they're very fearful about potential financial market catastrophe or economic troubles and tail risks," Yellen replied.

"And when there is financial market turbulence, often we see gold prices rise as people flee into them."

Building a position worth $4.6bn just before gold peaked in mid-2011, hedge fund group Paulson & Co., the single largest investor in the giant SPDR Gold Trust kept its shareholding unchanged between July and October to end the third quarter with GLD stock worth $1.3 billion, new regulatory filings said Thursday.

John Paulson's hedge funds had slashed their GLD holdings in half over the previous quarter, as prices fell at the fastest pace in three decades.

Gold prices then rallied 11% in the third quarter of 2013, even as global demand fell by one fifth according to the latest Gold Demand Trends report from market-development group the World Gold Council.

Paulson's PFR Gold Fund, which trades gold mining stocks and gold derivatives, has now lost 65% for 2013 to date, reports Bloomberg.

Revenue from the commodities markets has fallen by one fifth for the world's top 10 banks so far this year, reports Reuters, citing data from the Coalition consultancy.

Adrian Ash

(c) BullionVault 2013

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