China: gold before swine; Should gold traders be paying attention to Chinese pork prices?

China: gold before swine

Mar 28, 2013 8:24am by Leslie Hook

Should gold traders be paying attention to Chinese pork prices? It may sound outlandish, but new research has uncovered an interesting link between global gold prices and Chinese inflation (which in turn is often driven by pork prices). China accounts for a quarter of the world’s physical bullion demand so it’s no surprise to find it has a big role in setting global prices. But just how its influence works is not always clear, especially when weighed against other factors like crude prices, quantitative easing, or the strength of demand from India, the world’s biggest gold buyer. Now there is evidence to suggest a strong correlation between bullion prices and Chinese inflation, according to Na Liu, head of CNC Asset Management. He wrote in a recent note to clients: We have reviewed many Chinese macro indicators to detect their correlation with the gold price, and we are basically brought down to the very basics: the gold price is highly correlated to China’s inflation and real interest rate… This makes intuitive sense. Over the past few years, China’s jewellery demand shows only steady growth. The key driver for demand volatility comes from investment demand, and investment demand was driven by the need for purchasing power preservation and therefore varies as inflation expectation surges and ebbs. Last year, as China’s inflation cooled, gold demand did not increase in China at all. His chart illustrates how peaks in the gold price match peaks in Chinese inflation, while rising inflation is correlated with rising gold prices:

gold-price1

Source: CNC Asset Management

So what does this mean for gold bugs? Officials have warned that China faces inflationary pressures this year, with central bank governor Zhou Xiaochuan saying this month that China should be on “high alert” against inflation. Inflation for the first two months of this year came in at 3.2 per cent, its highest level in 10 months. The fear is that inflation could be pushed even higher by rising prices for pork, which is heavily weighted in the consumer price index because it is so widely consumed. As Rahul Jacob noted on beyondbrics, pork prices are expected to rise sharply this year, by as much as 16 per cent according to some estimates. If that happens, it could be good news for gold bugs.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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