October 29, 2013 / 10:40 AM / in 4 years

Asia Gold-Chinese prices at a discount on credit crunch fears

SINGAPORE, Oct 29 (Reuters) - Chinese gold prices closed lower than global prices on Tuesday for the first time this year, traders said, as fears of a credit tightening prompted investors to sell bullion for cash.

Prices on the Shanghai Gold Exchange closed about $2 an ounce lower than international spot prices, compared with April-May premiums as high as $30.

The last time Chinese prices traded at a discount to international prices was just before Christmas last year, according to traders.

“The rise in borrowing costs in onshore China plays a crucial role. People don’t want to keep the metal and they try to dump it to raise cash,” said one precious metals trader in Hong Kong.

Another trader said there had not been a significant drop in demand but liquidation of stocks was taking its toll on prices. “It really is driven by money markets.”

On Monday, money market rates in China reached their highest levels since June’s dramatic cash crunch as some market players believed that regulators had signalled they might clamp down on excessive liquidity to get property prices and inflation under control.

However, on Tuesday money rates stabilised after the central bank resumed open market operations for the first time since Oct. 15, easing worries that the authorities were preparing to dramatically tighten monetary policy.

The traders said premiums could come back up if global prices fell.

China has been a big buyer of gold this year, when the metal has lost about 20 percent of its value, and is set to overtake India as the biggest gold consumer in 2013.

China, where gold is a popular form of investment, does not release gold trade data but numbers from Hong Kong suggest that consumption is near record levels.

Macquarie Research said in a note on Tuesday that China bought 116 tonnes of gold from Hong Kong in September, only slightly lower than the 131 tonnes in August.

Though the imports from Hong Kong have fallen month-on-month, they have stayed above 100 tonnes for five straight months, indicating that demand is only cooling off from peak levels seen earlier this year and not dropping dramatically.

Demand in most other parts of Asia has been subdued, with premiums remaining stable from last week. However, Indian premiums are near record highs of $130 an ounce due to a shortage of supply. (Reporting by A. Ananthalakshmi; Editing by Alan Raybould)

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