China’s Gold Demand Soars

Gold held in its tight trading range with little reaction to the Federal Reserve decision. The Fed held rates and policy but seemed more open to rate increase later in the year. In a statement, the FOMC said the “near-term risks to the economic outlook have diminished,” language that implies the Fed could consider a rate hike two months from now. The Fed said the “labor market strengthened” and the economy is “expanding at a moderate pace.” Kansas City Fed President Esther George, who wanted a 1/4-point increase in rates, was the lone dissenter.
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Gold edged up to 1334.15 while silver surged to 20.078. Gold is up $6 for the day while the white metal added 382 points. At the same time the US dollar added 19 points to trade at 97.36.

“Our economists are expecting a rate hike in December, but if the Fed starts to sound hawkish now, that could weigh on gold,” UBS analyst Joni Teves said. “There are downside risks here.”

Investors will closely monitor the Fed’s statement, taking into account the bouncing nonfarm payrolls in June. Meanwhile, some analysts expect remarks of additional time being required for inflation to move towards the 2% target level.

Rate hikes typically blunt gold’s appeal by boosting the dollar. Rate increases also entice investors away from safe-havens such as gold, which doesn’t bear interest, and into instruments that offer better returns.

Some investors are rushing to close out existing positions on gold ahead of the Fed statement, said George Gero, managing director at RBC Wealth Management. While traders don’t expect the Federal reserve to change interest rates at the July meeting, speculation over a rate increase by the end of the year has grown in the past month.

“Most traders still think that the one hike that the Fed may talk about will come in December. However, the invitation to cover shorts is very strong.” Mr. Gero said.

Elsewhere news that the world’s biggest producer, China cannot keep up with its demand for gold, and Russian representatives at this week’s China Gold Congress & Expo in Beijing are keen to strike deals to supply the Chinese market.

China’s consumption of gold is set to reach 1200 tons annually by 2020, according to estimates from the Ministry of Industry and Information Technology (MIIT), cited by Shanghai Securities News in a report on Wednesday. In July 2014 Song Xin, who is also General Manager of the China National Gold Group Corporation, wrote that China should aim to accumulate 8,500 tonnes in official gold reserves, more than the US, in order to support its bid to make the renminbi a global currency.

Chinese investors in gold may have been deterred recently by this year’s steep rise in the price of gold; according to data from Marketwatch on Wednesday it was trading at $1,335.70 per troy ounce, an increase of 25 percent since January 4.

China produced 229.102 tons of gold during the first six months of this year, an increase in production of 0.16 percent compared to 2015.

Speculators are also gearing up for a Bank of Japan policy meeting later this week. Federal Reserve policymakers are looking for more evidence of a pick-up in inflation before moving on rates, analysts said, as they try to square a string of upbeat US data with a global growth slowdown and other headwinds.