Posted: ’22-JUL-05 13:45′

Precious metals reacted mildly positively to the news on Thursday that the Chinese Government is loosening its peg to the dollar (an effective revaluation of 2.1%) and linking to a basket of currencies. As of Thursday, the renminbi is allowed fluctuate by 0.3 per cent daily against the dollar and in a 1.5% band against other currencies.

The immediate response in the market to the Chinese government’s reaction was positive, notably from United States senior officials, who are suggesting that this move by the Chinese sets up a mechanism that, according to Treasury Secretary John Snow, “provides for a significant movement over time”. Apart from a 2.4% drop again the yen, the dollar’s immediate reaction has been cautious and limited. The fall against the yen was set against market feeling that following the Chinese move, the Japanese government might feel more amenable to allowing fresh further strength in the yen (China is Japan’s largest importer).

Gold Sees limited buying action

Gold saw some limited buying action, but nothing of any great note, while the dollar’s drop against the yen has stimulated a little platinum buying interest but not much as this is a seasonally slow period. One of the primary considerations of the Chinese government’s move is the effect on its own economy. With reports earlier this week that first half GDP was over nine per cent this technical revaluation of the currency will help to engineer a soft landing as it reduces local prices of imports.

And among these imports, of course, are the precious metals. It might be useful to put this into context.

The Chinese gold market has been going through a process of deregulation over the past few years, with the Government allowing free movement of prices and reducing the influence of the People’s Bank of China in controlling the trade flows. The jewellery sector is becoming increasingly liberalized and it is no longer necessary to gain permission to trade as a manufacturer, wholesaler or retailer.

The opening of the Shanghai Gold Exchange and increasing international involvement in the market is attracting increasing numbers of international operators (there are still some constraints on international operators – the gold that they are responsible for importing, for example, must be destined for local use rather than re-export). China is the fourth largest gold consumer in the world, with over seven per cent of world demand in 2004, the majority of which is concentrated in the jewellery sector – although in the mid to late 1990s platinum jewellery demand rocketed, partly because the gold market was still heavily regulated and partly because of the increasing trend towards white metal for adornment. As a result platinum jewellery went from virtually zero at the start of the 1990s to 1.5M ounces per annum in 2001 (or 53% of the world jewellery demand level of just under three million ounces in that year).

Since then, however, the liberalisation of the gold market and the very high price of platinum by comparison, and also by association the erosion of jewellers’ margins in the platinum sector has resulted in a sharp drop in platinum jewellery demand since 2002 and the resurgence of gold. Platinum jewellery tonnage in China is estimated by GFMS Ltd to have fallen by at least one third in 2004 alone, extending a decline that commenced in 2003. Palladium demand in Chinese jewellery more than doubled in 2004, due both to its use as an alloying element in white gold, but also to an increase in palladium jewellery per se. Does that have any implications on the gold market and the trend of rollover to gold IRA in the USA? Only time will tell.

While platinum jewellery demand is off, its use (and that of palladium) in the automotive industry in recent years has been increasing rapidly. All of China now has emission control limits than equate to earlier European standards, while Beijing and Shanghai will by at 2004 European level by 2008, with the rest of the country following on behind. As a result (and along with chemical and glass manufacture), China accounted last year for at least 15% of world platinum offtake and almost ten per cent of palladium demand.

The quasi-floating of the renminbi will help jewellery and investment demand as local prices fall; it may impinge slightly on the growth of PGM usage in the industrial sectors if it helps to engineer a soft landing – but on the bright side, a hard landing would have had a much worse effect.