The GOLD PRICE rose sharply Tuesday lunchtime in London, touching $1219 per ounce as Western stock markets fell hard following a 5% plunge in Shanghai, spurred by a change in China's debt market.
Major Western government debt prices rose, pushing interest rates lower, as weaker Eurozone debt fell.
China's main gold contract closed Shanghai trade 1.4% higher in Yuan terms on solid volumes. But it had earlier slipped to a slight discount against Dollar spot prices as the Chinese currency extended its fastest drop since 2008 to a second day.
"After sitting at [premiums] around +$2.50 to +$3.00 yesterday," says a note on Asian trade from Swiss refining and finance group MKS, "buyers were happy to scoop up metal here, which kept the spot gold buoyant above $1200."
Local traders attributed the Yuan's sharp decline – down to its lowest level vs. the Dollar since July – to "a late reaction to Monday's [weak] trade data," MKS adds, "as well as an expectation of a near term cut" to the required reserve ratio of Chinese banking deposits against loans, meaning looser of monetary policy.
Announced Monday, the new rule from China Securities Depository & Clearing Corp. won't allow anything other than AAA-rated bonds to be used as collateral for raising short-term loans through so-called "repo" agreements.
The change, says Bloomberg –
quoting analysis from Haitong Securities Co. – "means about 470 billion Yuan ($75.8 billion) of outstanding debt can no longer be pledged" in such deals, where the borrower and the lender agree the repurchase of the asset at the end of the loan.
In particular, complex "funding vehicles" issued by local government will be blocked as collateral.
Such LGFVs now total CNY 17.9 trillion ($2.9 trillion), swelling 67% between 2011 and 2014.
To formalize local government borrowing instead, rules barring the sector from issuing exchange-traded bonds have recently been eased.
"China, for all its talk about economic reform,
is in big trouble," reckons Anne Stevenson-Yang, research director of J Capital, speaking to
Barrons last week.
"The country is now submerged by the tsunami of bad debt that begets further unhealthy credit growth to service this debt."
Official China data say GDP grew four-fold over the decade to 2014.
China's private-sector gold demand rose 15 times by value over that period on the most widely-accepted data, overtaking world India as world No.1 by weight in 2013.
Dollar prices for London wholesale gold traded 2.0% higher for the week so far as New York trading began Tuesday.
Gold prices also rose sharply for non-Dollar investors, hitting a 7-week high in Sterling and a new 19-month high against the Japanese Yen.
Silver meantime rose 2.5% from last week's close in Dollar terms, touching its best level since the end of October at $16.82 per ounce.
