Gold Prices Find Support From China

NEW YORK (TheStreet) -- Gold prices rose Tuesday as China announced plans to expand the gold market in the country, and bargain-hunters took advantage of lower prices.

Gold for December delivery settled $2.10 higher to $1,187.50 an ounce at the Comex division of the New York Mercantile Exchange. The gold price Tuesday traded as high as $1,193 and as low as $1,181.60. The U.S. dollar index was slipping 0.38% to $80.63 while the euro was rallying 0.32% to $1.32 vs. the dollar. The spot gold price Tuesday was rising more than $4, according to Kitco's gold index.

With gold prices trading $75 off their record high of $1,264 an ounce, many investors were taking advantage of the current price decline to buy gold at cheaper prices. Gold is stuck in a broad trading range from $1,160 to $1,200, which is attractive for many price-sensitive markets like China and India.

Also buoying confidence in the gold sector Tuesday was a supposed statement from the People's Bank of China that it would allow more banks to import and export gold in order to expand the gold market in the country [although finding the actual report was difficult].

A press release from the Chinese State Council Web site said the central bank was expanding the Chinese gold market to "increase the competitiveness of domestic financial markets while broadening investment channels for ordinary customers." Reportedly, China is also debating allowing foreign suppliers to "provide gold bullion directly for the Shanghai Gold Exchange."

"These latest steps in the process of deregulation of the gold market in China are extremely encouraging and seem certain to lead to increased gold demand in a country that has recently been contending with India for the position of the largest consumer of gold in the world," says George Milling-Stanley, managing director, Government Affairs, World Gold Council.

China is already one of the largest gold producers in the world and a leading consumer. China bought so much gold in 2009 that it equaled 11% of global gold demand.

"As the Chinese let their currency float, it's prudent to let their people buy more gold," says Frank Holmes, CEO of U.S. Global Investors. "And timingwise, this move fits into a bigger picture on seasonality. The summer is usually the lowest time of the year for the gold price, so it's the best time to buy."

China's central bank currently holds 1,054 tons of gold, and in the first quarter of 2010, jewelry demand in the country grew 11% to 105.2 tons, according to the World Gold Council.

The council also forecasts that Chinese gold demand could double in 10 years from $14 billion to $29 billion, as official buying is accompanied by personal consumption from the growing middle class. Tuesday's news from China points to an expanding gold trading market as well, which has many analysts anticipating increased demand and higher gold prices.

"I do believe that there'll be more trading interest [in gold]," says George Gero, vice president of global futures at RBC Capital Markets. Gero explains that this trading interest could help offset any central bank or IMF gold sales in the future. "But I think for now gold is suffering from both summer doldrums and loss of trading interest."