03 August 2010, 12:21 p.m. EST
By Daniela Cambone
Of Kitco News www.kitco.com
Montreal (Kitco News) -- China’s plan to develop its gold market comes at a time when ETF demand for gold is weakening and indicates that emerging market demand is increasing sharply, said HSBC’s James Steel on Tuesday.
“We had a theme last year and the year before which was: emerging market demand for gold declined; not just in China but in many other countries because of the rising price. Whereas ETF off take was very strong -- lately we have seen ETFs weaken a little but emerging market demand has increased sharply,” Steel, HSBC’s Senior Vice President, Metals Analyst, told Kitco News.
The People's Bank of China said Tuesday that it would allow banks to hedge bullion positions in overseas markets; push for banks to lend more to domestic gold firms looking to go abroad; and actively develop more yuan-denominated gold derivatives.
“China has become a significant consumer of gold – one could imply that the growing income particularly in the economic brackets that are most likely to purchase gold, is growing pretty significantly,” said Steel.
This without doubt is feeding a greater demand for bullion, he said. “Inflation is also a little bit higher in China than the rest of the world, that is also an issue supporting bullion demand,” Steel said.
The China news is symptomatic of greater demand in the non-OECD world and that might be taking some of the slack from reduced ETF demand. “I think that explains why the gold market has been firm despite the decline in ETF holdings,” Steel said.
Steel said the China news does not come as much of a surprise and is unlikely to upset the markets greatly. The spot price of gold was rising more than US$5 dollars Tuesday sitting at US$1187 an ounce.
In a statement on its website, China’s central bank also said it might allow foreign institutions to participate in gold trading in the Chinese market, but gave no timeline or details for how that might happen.
"These latest steps in the process of deregulation of the gold market in China are extremely encouraging, and seem certain to lead to increased gold demand in a country that has recently been contending with India for the position of the largest consumer of gold in the world,” said George Milling-Stanley, Managing Director, Government Affairs, World Gold Council .
The announcement from the People’s Bank contradicts those who had misinterpreted recent comments from officials about the limited role of gold in the country’s official reserves as implying some sort of disapproval of gold, said Milling-Stanley.
“That is clearly not the case, with the government taking significant steps to improve access to gold for their citizens," he said.
--By Daniela Cambone of Kitco News, dcambone@kitco.com
