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China’s real interest rate and the demand for gold

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China’s real interest rate

In the last part of this series on gold, we looked at how China’s a big part of the overall demand market. That’s why it’s important to track Chinese demand data. Now, we’ll see if China’s real interest rate, or nominal interest rate adjusted for inflation, can give us any clues about a pattern in this demand.

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Tracking China’s real interest rate

We’ll look at nominal interest rates and inflation separately. Then we’ll see how combining them could impact gold demand.

The household saving deposit rate in China is set by the People’s Bank of China. Currently, it’s 2.75% following a 25 basis-point cut by the bank in November.

China’s inflation rate is reported by the National Bureau of Statistics of China. It’s reported on a monthly basis. In December, the inflation rate came in at 1.5%. In November, it was 1.4%.

When you combine the nominal rate of 2.75% and inflation of 1.5% for December, you get a 1.25% real rate of interest for savings. This rate is lower than that of November when it was 1.35%. But on average, it’s been increasing, a result of low inflation. The rate was 1.15% for October.

The increase in the 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 invest in gold. This is negative for gold prices and gold-backed ETFs such as the SPDR Gold Trust (GLD). It’s also negative for gold stocks such as Goldcorp (GG), Barrick Gold (ABX), Newmont Mining (NEM), Kinross Gold (KGC), Yamana Gold (AUY). These companies make up 39.1% of the VanEck Vectors Gold Miners ETF (GDX).

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