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A Pop In Chinese Equity Bubble Could Push Gold Higher – Natixis

(Kitco News) - One French bank has described the Chinese equity market as “impending doom” which could be good for the gold market in the long-term.

Gold demand has suffered in Asia during the last 12 months as Chinese investors have jumped into equity markets but their funds could start to shift back as equities enter bubble territory, Bernard Dahdah, precious metals analyst at Natixis, said in a research note Thursday.

According to the World Gold Council, gold demand in China during the first quarter of 2015 was 272.9 tonnes, down 7% from the first quarter of 2014, which saw gold demand of 293.8 tonnes. However, the council does note that first quarter demand was still well above the five-year average of 231.9 tonnes.

Dahdah noted that the yellow metal has not been able to compete this year as equities as rallied close to 150% in the last 12 months.

“As with all bubbles, while it keeps inflating investors may be happy to remain invested. If a few IPOs were to fail spectacularly, or one or two larger companies allowed to default, a sharp fall in Chinese equity valuations would not surprise anyone. Gold could then become a more interesting alternative for Chinese investors,” he said in the report.

While Chinese equities are an extreme example, they are not the only ones. Dahdah noted that global gold demand has suffered as investors put more of their faith in stocks markets.

A common theme in these financial markets has been a reduction in fear sentiment. Investors are more confident that the aftershocks as a result of the financial risks have abated.

“The dollar’s growing strength over the past year has firmly subdued fears of a U.S. currency collapse and hence the role of gold as a safe haven has become significantly less attractive, even for risk - averse investors,” he said. “As investor confidence in global financial stability increases, so does risk appetite. As a result, equity markets across the developed world are currently trading close to all-time highs.”

Although western markets don’t have bubbles as big as China, Dahdah said there is still a risk of a sizable correction as the easy money from the Federal Reserve’s quantitative easing measures dry up.

“In such a scenario gold prices may be able to break with their recent correlations, benefiting from an environment in which rising bond yields accompany an equity market crash,” he said.


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By Neils Christensen of Kitco News; nchristensen@kitco.com
Follow Neils Christensen @neils_C

 

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