As Yuan Sinks, Goldman Flags Scope for Gold Demand in China

(Bloomberg) -- Further weakness in China’s currency and investors’ concerns over the outlook for the nation’s property market may spur gold demand in Asia’s top economy, according to Goldman Sachs Group Inc., which made the forecast as the offshore yuan sank to a record.

“The potential drivers of increased Chinese physical buying include purchasing gold as a way to hedge for potential currency depreciation in the face of capital controls,” analysts including Jeffrey Currie and Max Layton, wrote in a report dated Oct. 24. Bullion consumption in China may also rise “as a way of diversifying away from the property market,” they said.

The potential for stronger demand may help prop up prices that are headed for a monthly loss as the Federal Reserve prepares the ground for higher U.S. interest rates. The offshore yuan dropped this week as Chinese policy makers signaled they are willing to allow greater currency flexibility amid a slump in exports and rise in the greenback. China’s government has also moved to rein in excessive speculation in real estate after a run-up in prices.

Chinese physical gold exchange-traded funds holdings “have increased further, and appear correlated with recent yuan depreciation,” the analysts said. “Should the recent decline in property prices in October and yuan depreciation continue we may see Chinese gold investment demand respond.”

Goldman reiterated its view any sell-off substantially below $1,250 an ounce should be seen as a buying opportunity, and the bank remains broadly neutral on the outlook for gold through the year-end. Metal for immediate delivery was at $1,267.56 on Tuesday, while on the Shanghai Gold Exchange, bullion of 99.99 percent purity was at 277.20 yuan a gram.

Shipments of gold from Switzerland to China increased to 35.5 metric tons last month from 19.9 tons in August, according to figures from the website of Swiss Federal Customs Administration. The European country is a major bullion-trading center and home to several refineries.

The offshore yuan exchange rate was at 6.7836 a dollar at 1:01 p.m. in Hong Kong, after dropping to 6.7885, the weakest intraday level in data going back to 2010. In Shanghai, the currency was little changed at 6.7760, close to a six-year low and past the 6.75 year-end median forecast in a Bloomberg survey.

To contact the reporter on this story: Ranjeetha Pakiam in Singapore at rpakiam@bloomberg.net. To contact the editors responsible for this story: Jake Lloyd-Smith at jlloydsmith@bloomberg.net.