How do Chinese real interest rates impact gold prices?

China’s real interest rate and the demand for gold

Lets  look at nominal interest rates and inflation separately. Then we’ll see how combining them could impact gold demand.

The household saving deposit rate in China is set by the People’s Bank of China. Currently, it’s 2.75% following a 25 basis-point cut by the bank in November.

China’s inflation rate is reported by the National Bureau of Statistics of China. It’s reported on a monthly basis. In December, the inflation rate came in at 1.5%. In November, it was 1.4%.

When you combine the nominal rate of 2.75% and inflation of 1.5% for December, you get a 1.25% real rate of interest for savings. This rate is lower than that of November when it was 1.35%. But on average, it’s been increasing, a result of low inflation. The rate was 1.15% for October.

The increase in the 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. It 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), New mont Mining (NEM), Kinross Gold (KGC), Yamana Gold (AUY). These companies make up 39.1% of the Market Vectors Gold Miners ETF (GDX).

On the other hand - some macro economic studies suggests Gold Under performs When Real Interest Rates Are High

That being said, If Chinese Interest rate cut have a bearish effect on gold prices then a trader has to think why China’s gold imports from Hong Kong rise for 3 straight months??