Tuesday, October 18, 2011

Short Term: Gold may loose it shine.

Stocks and other commodities were being dragged down Tuesday by slowing growth from China, which is a mixed bag for gold. China grew 9.1% in the third quarter, which was below estimates. The number combined with slowing export results have made investors nervous that the country, a voracious consumer of all commodities, will stop buying.
Goldman Sachs wrote in a note that downside risks to growth remain, with external demand expected to weaken in the fourth quarter but that China might shift its monetary policy as a result. China has been aggressively raising interest rates and raising reserve requirements to try to drain money from the system with inflation at 6.1%. Goldman estimates that inflation could fall to 5% in the next quarter and that the lower level plus growth pressure could trigger a relaxation, by either stopping rate hikes or freeing up more cash.
Interest rates are at 3.5% and even if inflation falls to 5%, interest rates would still be a negative 1.5%, which typically has been good for gold. When an investor's money is losing value in the bank, gold becomes an attractive alternative asset to own. On the flip side, if slowing growth means less inflation in China, then gold will also become less attractive as a hedge against rising prices.

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