Tuesday, May 11, 2010

Rising Chinese Inflation Augurs Well For Gold

The Chinese economy is growing at double-digit rates, yet, instead of rejoicing, the Chinese leadership is worried.  Beijing has slowly begun to take steps to begin to cool its economy and an increase in interest rates is thought to be coming sooner rather than later.  The various stimulus plans appeared to have done their job, but now comes the inevitable effect on prices.

Recently released data indicates that the Chinese economy is overheating and that prices are beginning an upward creep.  Consumer prices in China rose 2.8%  in April from the same month a year earlier, the fastest pace in 18 months - but below Beijing’s full-year target of 3% , data released on Tuesday showed.

Adding to fears of potential overheating, Chinese property prices jumped 12.8% in April from a year earlier, the biggest increase since records began in 2005, although sales volumes have already fallen substantially in many big cities in reaction to a string of government measures to cool the market.

More disturbing was the news that Producer prices rose 6.8% in April, up from March’s 5.9% rise, indicating that consumer prices are likely to increase faster in the coming months.

Food prices make up about a third of China’s consumer price index and were the main driver of higher inflation in April, rising 5.9% from a year earlier, while non-food prices rose a mere 1.3%.

With the benchmark one-year bank deposit interest rate at 2.25% , Chinese savers are already faced with negative real interest rates, making investments in the booming property market more attractive.

The fear of Chinese policy tightening has dogged commodities markets in recent weeks, with base metals well off their mid-April peaks.

This morning,  copper for delivery in three months fell 2.1% to $6,970 a tonne on the London Metal Exchange.  Aluminium was off 2.9% at $2,075 a tonne, while lead – particularly exposed to moves in Chinese demand as it is used in car and electric bike batteries – dropped 3.7% to $2,022 a tonne.

As inflation creeps up in China, as well as the rest of the Asian-bloc, it will undoubtedly spill-over into the rest of the world.  Just as Chinese infation is rearing its head, so should that in the United States.  Washington has also enacted substantial stimulus programs and the accompanying inflation is inevitable.

Especially in a low interest rate environment, this can only be bullish for Gold.  It's no surprise that the yellow metal has taken center stage, broken out to new all-time highs and will undoubtedly explode higher as the world scrambles for the only bona-fide infation hedge.  Investors would be wise to jump on board before its too late.

Marko's Take

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