Inflation rising in both countries has been a growing concern which increases their appeal to gold, a safe haven asset that protects against rising inflation. The falling prices bring both countries the perfect opportunity to buy up gold.
Author: Shivom Seth
Posted: Thursday , 05 May 2011
As concerns about rising inflation in both countries increases the appeal of gold as a store of value, traders and investment bankers maintain that imports are set to surge this year
The signs are ominous. China is set to introduce further monetary tightening measures to curb inflation, and weaker-than-expected US ADP private sector employment data has convinced investors that US interest rates are set to remain low this year.
On May 3, India's central bank raised key interest rates by half a percentage point. This is the ninth hike in just over a year.
``Inflation has become a threat to growth in both China and India. China has made several moves to tighten monetary policy over the past year to control inflation. The latest interest rate hike by India has further stoked speculation in the market that precious metals prices are set to dive soon,'' said Harminder Baweja, research analyst at an investment research firm.
However, Baweja maintains a lull in the near term could ensure a jump in imports. ``India is already set to double its silver purchases to 1,500 tonnes this year. There are reports that reserve managers in China are using gold to diversify their exposure to the dollar. All these point to higher imports in both the countries,'' he said.
The US ADP data is significant, given that it is the first in a slew of employment numbers that are to be released. On Friday, the official monthly non-farm payroll numbers are set to be announced, while Thursday will have the weekly numbers.
``On Wednesday, gold futures had already extended their losses and silver futures continued to plunge,'' said Sharmista Shah, an investment banker.
She added that the People's Bank of China had said in its quarterly monetary policy report, published on Tuesday, that the country's economy faced ``increasing pressure from imported inflation.''
The policy report added that stabilising prices and inflation expectations continued to remain the central bank's top priority, fuelling expectations that China would do more to curb inflation and cool its rapidly growing economy.
On the Comex division of the New York Mercantile Exchange on Wednesday, gold futures for June delivery traded at $ 1,532.55 a troy ounce, falling 0.37%.
``The US dollar hit a three-year low against major currencies on Wednesday. The way silver has moved down, similarly gold will follow. It might not be as volatile the way silver has gone. On the international market, we expect prices to be around $1522-$1523. This means a downside of about $ 8-10 from the current levels,'' said Ashok Mittal of Vertex Securities, a broking firm in Mumbai.
Commenting on imports, he added that in 2010, gold imports in China had risen to 209 metric tonnes as compared to 45 tonnes for 2009. ``Inflation was a major driving force,'' Mittal said.
He added that sentiment among precious metals investors had also taken a hit after reports that high-profile investor George Soros had, over the past month or so, sold gold and silver. Soros has been rather bullish on gold and a top investor in gold funds.
To see original article CLICK HERE