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24-Oct (Bloomberg) — Further weakness in China’s currency and investors’ concerns over the outlook for the nation’s property market may spur gold demand in Asia’s top economy, according to Goldman Sachs Group Inc., which made the forecast as the offshore yuan sank to a record.
“The potential drivers of increased Chinese physical buying include purchasing gold as a way to hedge for potential currency depreciation in the face of capital controls,” analysts including Jeffrey Currie and Max Layton, wrote in a report dated Oct. 24. Bullion consumption in China may also rise “as a way of diversifying away from the property market,” they said.
The potential for stronger demand may help prop up prices that are headed for a monthly loss as the Federal Reserve prepares the ground for higher U.S. interest rates. The offshore yuan dropped this week as Chinese policy makers signaled they are willing to allow greater currency flexibility amid a slump in exports and rise in the greenback. China’s government has also moved to rein in excessive speculation in real estate after a run-up in prices.
Chinese physical gold exchange-traded funds holdings “have increased further, and appear correlated with recent yuan depreciation,” the analysts said. “Should the recent decline in property prices in October and yuan depreciation continue we may see Chinese gold investment demand respond.”
PG View: With the yuan falling to new 6-year lows today — and the dollar index at 8-month highs — Chinese interest would indeed explain the buoyancy of gold.
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