China’s real interest rates
In the last part of the series, we discussed how China’s a big component in the overall demand market. As a result, it’s important to track Chinese demand data. Now, we’ll see if China’s real interest rates—nominal interest rates adjusted for inflation—can give us any clues about its demand pattern.
We’ll look at the two components separately. Then we’ll see how combining them would impact gold demand.
The household saving deposit rate in China is set by the People’s Bank of China (or PBoC). Currently, it’s set at 3%.
China’s inflation rate is reported by the National Bureau of Statistics of China. It’s reported on a monthly basis. For August, the inflation rate came in at 2%. This is lower compared to July. The inflation rate was 2.3% in July. It was below market estimates.
When we combine the nominal rate of 3% and inflation of 2% for August, we arrive at 1% real rate of interest for savings. This rate is increasing. The rate was 0.70% in June and July. It was 0.50% in May. The increase is a result of inflation.
The increase in real interest rate on savings motivates people to put their money in savings instead of investing in gold. Gold is used as an inflation hedge. It protects the value of money.
Increasing real interest rates in China will stimulate people to save instead of investing in gold. This is negative for gold prices and gold-backed exchange-traded funds (or ETFs) like the SPDR Gold Shares (GLD). It’s also negative for gold stocks like Goldcorp Inc. (GG), Barrick Gold Corp. (ABX), Newmont Mining Corporation (NEM), Kinross (or KGC), Yamana Gold (or AUY), and ETFs like the Gold Miners Index (GDX).
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