The last time China experienced a significant slowdown was toward the end of 2008. Over the next two years, China provided four trillion yuan ($586 billion) in stimulus money to boost growth. While investors may be expecting another replay of stimulus, China is indicating that the current slowdown is not significant enough, and inflation is still a concern. On Wednesday, the China Securities Journal said the nation has no reason to slash interest rates in the first quarter of 2012, because real interest rates remain negative. The journal explains, "Any change in China's interest rates will come at a more appropriate time window, when inflation eases further and when economic growth slows down further."
Investor Insight: Global Factors Boost Gold and Silver Demand.
The inflation rate in China was last reported at 4.1% in December 2011. Inflation hit a three-year peak of 6.5% last July, and averaged 5.4% over the course of 2011. The official inflation target in China for 2011 was 4%. XE, a leader in foreign currency research and tools, explains: "One-year deposit rates, meanwhile, are set at 3.5%, leaving a negative real interest rate of 0.6%. Many economists believe China will not move to cut lending rates while inflation remains above deposit rates." The China Securities Journal also notes that monetary policy in China would be conducted in the open-market operations and required reserve ratio adjustments instead of further interest rate cuts.
Despite predictions of a Chinese hard-landing, the most recent GDP data eases these concerns, at least in the short term. Although China may not provide more monetary easing through rate cuts, the nation avoiding a hard landing is bullish for precious metals and commodities. The latest GDP numbers not only sent gold and silver higher, but also oil and copper. On Tuesday, crude oil prices climbed back above $100 per barrel, as copper prices hit their highest level since September.
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Instead of speculating on Chinese stimulus programs, investors should take notice that other trends in the precious metal bull market are gaining strength. According to the latest GFMS annual survey, central banks increased net purchases by fivefold to 430 tons (t) in 2011, and may purchase another 190t in the first half of 2012. Last year's net purchases of gold by central banks was the highest level recorded since 1964. In 2010, net purchases only equaled 77t. "Attitudes among central banks haven't really changed," Thomson Reuters GFMS annual survey said. "There's still that desire to come into the gold market to diversify some of the assets away from foreign exchange and to boost gold holdings." As demand increases for physical gold and silver, precious metal prices will receive support and climb higher. The GFMS annual gold survey also predicts that gold prices will make a push towards $2,000/oz in the second half of 2012.
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Eric McWhinnie, Wall St. Cheat Sheet
To contact the reporter on this story: Eric McWhinnie at [email protected]