Precious metals prices were buffeted last week as news was released of a reduced economic growth rate in China that sparked renewed speculation of near term monetary easing by the People’s Bank of China or PBOC.
The release of softer Chinese GDP data may have prompted a rally in gold and silver prices as traders increasingly anticipated that the PBOC may move to increase economic production by lowering its benchmark interest rates. Chinese stock prices also generally improved.
Nevertheless, these initial gains were soon moderated by selling pressure and gap filling (where technically traders like to see the trade retrace a bit and fill in moves), that emerged in the metals on news that the Indian government would almost double bullion import duties — a move that was expected to dampen demand in the world’s top bullion consuming country.
Chinese Quarterly GDP Falls Below 9% Level
In particular, the Chinese National Bureau of Statistics put out its quarterly Gross Domestic Product or GDP report on January 17th, which indicated that the Chinese economy had grown by only 8.9% in the last quarter ending in December 2011 compared with the level of production seen in the same quarter of the previous year.
This result was significantly weaker than the 9.1% growth level seen the previous quarter and was also well off the recent 11.9% peak released in April of 2010, although it modestly exceeded market analysts’ consensus expectations of 8.7%.
Furthermore, this event marked the first time since January of 2010 that a Chinese GDP release had fallen below the psychological 9% level. The weaker data also demonstrated a continuation of the recent downwards trend in that closely watched economic indicator.
Weaker Chinese Growth Data and Home Sales Data Sparks PBOC Easing Speculation
The softer growth seen in China was largely attributed to a decline in the demand for exports due to the ongoing Eurozone debt crisis that has increased the odds that the PBOC may soon ease its currently tight monetary policy stance.
The Euro crisis also took a turn for the worse recently as credit downgrades of more Eurozone member nations were announced during the past week, and this has substantially dampened appetite for risk assets in emerging markets.
Another contributing factor supporting easier PBOC monetary policy was the recent weakness seen in domestic real estate prices in response to the Chinese government’s action to moderate property values. Chinese home sales data for 2011 showed an increase at the lowest level for three years.
India Almost Doubles Precious Metals Import Duties
Also significantly affecting bullion prices in recent days was the news released on January 17th that India would be boosting its import tax on gold by 90 percent and its silver import tax by 100%. The notable import duty rises were aimed at increasing the country’s revenue base by taxing jewelry metals that have historically been very popular as luxury and gift items within the country. Since India (debatably with China) holds the top spot as the largest consumer of precious metals in the world, this import duty increase could significantly slow demand for physical bullion within that key emerging market economy.
Stock prices of Indian jewelers fell in response to the news, and bullion selling pressure emerged due to anticipated weaker demand, which helped soften gold and silver prices.