Gold Prices Flat As Traders Reserve Judgement On China Slowdown

Gold bullion was trading flat today with only a slight drop from $1309.70 to $1307.90 an ounce. Conflict between the Ukraine military and pro-Russian separatists, together with weaker than forecast economic data in China manufacturing figures stopped precious metal prices falling towards the anticipated $1250 mark.

A spike in gold price on Friday following the Odessa fire which killed 46 people came a disappointment to consumers hoping to pick up some bullion bargains, but given the fragility of the geopolitical tug-o-war in eastern Ukraine, gold is looking a good purchase even at current prices.

The reason for that is because the Chinese economy, the world’s second largest behind the United States, is also showing more signs of cracking. Earlier this year, flaws in the banking system in the People’s Republic of China were exposed when several companies defaulted on loans hedged by metal ores.

It had been common practice for banks to lend Chinese companies dealing with overseas investments to hedge loans against metal ores when firms did not have sufficient capital. Although the practice is widespread in China it is a risky business and thus conducted under what has become known as the shadow banking system, principally because the system is unregulated.

Although the Chinese government has turned a blind eye to shadow lending, defaults on payments earlier this year left the Republic standing on a very precarious crevice. Two months down the line and further concerns have been raised following four straight months of weakened data in the manufacturing sector which has plummeting US stocks into the red.

China reform

It was only a couple of years ago that the world’s economic superpowers were considering China could rescue the world economy. Now they are worried China could be the catalyst of the collapse fuelled by a surge of risky loans by state-owned banks.

The Central Bank of the People’s Republic of China have introduced strict measures in recent months to prevent a credit crunch and support growth by inducing private sector investment. However, analysts feel greater measures will be needed for the economy to regain its momentum.

A collapse of the Chinese economy will also bring the US economy to its knees, and the global economy with it. Chinese investment in US factories and real estate was $14bn last year and US exports of goods to the Far East hit a record $122bn. European companies also expanded their trade in China and the slowdown leaves the Eurozone in a vulnerable position given its already critical financial stress.

Although many market speculators remain optimistic Chinese authorities will maintain a steady growth, the slowdown in growth for raw materials has raised questions whether we are heading for another global recession. If the markets continue to contract, the anticipated credit crash will fall sooner than expected.

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