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Chinese real interest rate gives clues about demand for gold

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China’s real interest rate

In the last part of this series, we saw that China plays a big part in the overall demand market for gold. That’s why it’s important to track Chinese demand data. Now we’ll see if the Chinese 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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China’s real interest rate

Let’s first look at nominal interest rates and inflation separately. Then we’ll see how combining them could impact the demand for gold.

The household savings deposit rate in China is set by the People’s Bank of China. Currently, it’s 2.50% following a 25 basis-point cut by the bank in February. This is the second interest rate cut by the bank in less than four months.

China’s inflation rate is reported by the National Bureau of Statistics of China on a monthly basis. In February, the inflation rate came in at 1.4%. In January, it was 0.8%.

When you combine the nominal rate of 2.50% and inflation of 1.40% for February, you get a 1.10% real rate of interest for savings. This rate is lower than the January rate of 1.95%. But on average, it’s been increasing, a result of low inflation.

An increase in the Chinese 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 and 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), and Yamana Gold (AUY). These companies make up 32.7% of the VanEck Vectors Gold Miners ETF (GDX).

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