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Gold Price "Driven by Chinese Pork"

THE PRICE of pork in China could be a key driver of the global gold price, new research suggests.

Chinese inflation, together with the real (i.e. inflation-adjusted) rate of interest, appear to have a strong link to the price of gold. Food prices, in particular the cost of pork, make up a large component of China's inflation data.

"We have reviewed many Chinese macro indicators to detect their correlation with the gold price, and we are basically brought down to the very basics: the gold price is highly correlated to China's inflation and real interest rate," says Na Liu, founder of Toronto-based CNC Asset Management, which specializes in commodities and Chinese equities.

"This makes intuitive sense... The key driver for demand volatility comes from investment demand, and investment demand was driven by the need for purchasing power preservation and therefore varies as inflation expectation surges and ebbs."

China's inflation rate eased over the course of 2012, hitting a 33-month low of 1.7% in October, according to official figures, having been as high as 6.5% in July 2011. 

Last month however the official inflation rate jumped to 3.2%, up from 2.0% a month earlier. The February inflation figure included a 6% year-on-year rise in food prices. 

A couple of months ago, China Daily reported that pork prices had risen 10% over the preceding two months. Standard Chartered has said pork prices in China could rise 16% this year.

Research into Chinese gold demand by BullionVault in 2011 also found a link between the real interest rate and how much gold people buy.

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