Gold holds near $4,000 after China ends tax break for retailers

Gold held around $4,000 an ounce after a weak start on Monday as China ended a long tax rebate for some retailers in a move that could weigh on demand in one of the world's largest precious metals markets.

Bullion for immediate delivery was little changed around midday in London, after falling as much as 1% in early trading. Beijing announced Saturday that it will no longer allow some retailers to fully offset value-added tax when selling gold they bought on the Shanghai Gold Exchange and Shanghai Futures Exchange. The news sent Chinese gold jewelry stocks tumbling.

Under the new policy, companies that produce so-called gold without investment, such as jewelry or industrial applications such as electronics, can offset only 6% VAT, compared to 13% previously. Companies that are not members of the exchanges will be subject to the same change when selling investment products, including gold bullion.

Gold hit a record high in October, boosted by a retail buying frenzy, but has since fallen sharply. Prices are still up more than 50% so far this year, even after the pullback. Many of the fundamentals that fueled the rally, including haven and central bank demand, are expected to hold.

“Tax changes in the largest gold-consuming country will affect global sentiment,” said Adrian Ash, research director at BullionVault. But the rebound in London markets on Monday, following weakness during Asian hours, shows that bullish sentiment remains strong, he said.

“China's new policy complicates gold's new found holding pattern, potentially hurting its ability to stay above $4,000. It remains to be seen whether official sector demand can provide strong enough support to offset any drag on Chinese consumers.”

Among jewelry stocks, Chow Tai Fook Jewelery Group Ltd. fell as much as 12% in Hong Kong, Chow Sang Sang Holdings International Ltd. lost more than 8% and Laopu Gold Co. fell more than 9%. The tax change is likely to “cause the entire industry to raise prices to overcome cost pressure,” analysts at Citigroup Inc., including Tiffany Feng, wrote in a note.

Spot gold was trading at around $4,004.86 an ounce at 11:32 a.m. in London. Silver was also little changed, while platinum and palladium rose.