Gold tarnished by Chinese demand, Fed

Domestic precious and industrial metal futures plummeted last week due to concerns about Chinese demand, a sudden tightening in liquidity and uncertainty about the US Federal Reserve's monetary stimulus program.

The most traded gold contract on the Shanghai Futures Exchange (SHFE) plunged 5.72 percent last week to 261.30 yuan ($42.60) per gram, or $1,325 per troy ounce. The December SHFE silver contract collapsed 8.58 percent to 4,082 yuan per kilogram.

The benchmark August gold future on Comex in the US lost 6.9 percent to end the week at $1,292 per ounce.

The premium for gold on the Shanghai markets has narrowed over the last few months, illustrating a drop-off in Chinese demand for the metal, according to a research note published Friday by the Australian bank ANZ.

"In the days after April 15, the SHFE traded as high as $90 over the international spot price of gold. This sparked record demand for physical gold in China and, coupled with seasonal Indian demand, was a huge factor in the recovery in price back to $1,475 per ounce," the ANZ note said.

Gold prices have sunk since that demand has weakened, most recently from the sudden spike in interbank interest rates, which hit a record high of 11.2 percent Thursday on a weighted average basis, according to the bank.

"Overall, demand in China remains good, just not explosive," they said. "Concerns and market jitters around Chinese growth prospects and the potential impact of higher short-term funding costs on Chinese banks could limit the near-term demand for spot gold."

In the meantime, global demand for the precious metal has fallen due to a confluence of ongoing factors such as the strengthening of core global currencies, low inflation in China and the developed world and expectations that the US Federal Reserve will begin winding down its monetary stimulus programs.

In base metals, the most traded SHFE copper contract fell 3.5 percent to 49,650 yuan per ton over last week.