Gold Continues Rise, HSBC Enters China Market

Online, August 31, 2011 (Newswire.com) - Gold hit another all-time high on Friday as investors sought a safe haven after anemic U.S. growth data raised the specter that a potential recession could spur the Federal Reserve to loosen monetary policy. Gold was helped by a sinking dollar, as investors fretted over sovereign debt in the United States and Europe. U.S. political leaders remained at odds over how to reduce the deficit as the clock ticked toward an August 2 deadline to raise the government debt ceiling. Bullion, which usually rises as the dollar weakens, hit its third record in five days, notching a near 9 percent monthly gain for July. Gold rallied after U.S. Commerce Department data showed the economy stumbled in the first half of 2011 and came close to contracting in the first quarter. Some investors worried about the risk of a recession that could make the Fed more accommodative, feeding inflation and boosting gold prices.

Investors are particularly concerned because the US sovereign debt market has traditionally provided a "risk-free" basis against which many other investment assets are gauged. Thus, they have turned to the other asset they consider risk-free: bullion. Sales of bullion coins have been more subdued than during previous episodes of heightened nervousness. Although gold coin buying accounts for a relatively small slice of overall investment demand, traders see it as an important leading indicator of sentiment. The US Mint, which sells the popular one-ounce American Eagle gold coin, says investors snapped up 554,000 coins between April and July 2010 and 489,500 between January and April 2009. Since April, however, sales have been lower, at 336,500 coins. Gold prices remain a long way below the high of $2,300 set in 1980. Citigroup says there is a 25 per cent probability of a "short-term, but not lasting" spike above $2,500 an ounce. The balance between physical supply and demand of the metal will be important. The summer usually marks a quiet period for consumption by the two largest buyers: India and China. While India has surprised dealers with an unseasonal spurt of demand, there is anecdotal evidence that Chinese buying has slowed. Meanwhile, supply is growing as gold is recycled through the scrap market.

HSBC's China banking unit has obtained regulatory approval for membership of the Shanghai Futures Exchange, becoming the first foreign bank allowed access to the country's gold futures market. HSBC will join a small elite club of financial institutions that have been granted access to trade gold futures in Shanghai. In April 2009, four domestic commercial banks were granted access to trade as authorities moved to inject more liquidity into the product. Under China's strict laws governing the financial industry, financial institutions such as banks, securities firms, mutual funds and insurance companies are banned from entering the commodity futures market without special regulatory approval. The World Federation of Exchanges says trading firms around the world are eager to access China's commodity exchanges, which made up 51 percent of volumes of commodity derivatives traded worldwide in 2010.