Why Gold Bugs May Wish for a China Hard Landing

Chinese shoppers look at gold jewellery on display at a shop in Hefei, east China's Anhui province.
Stringer | AFP | Getty Images
Chinese shoppers look at gold jewellery on display at a shop in Hefei, east China's Anhui province.

Commodities have taken a beating lately from fears of a slowdown in China, but one battered metal could actually benefit from a hard landing in the world's second largest economy, says Barclays.

Chinese demand for gold will likely benefit from a steep fall in the country's economic growth, which could trigger a structural change in why people buy the precious metal as well as increase its safe haven appeal, Barclays Research said in a note on Wednesday.

"A hard landing could shake faith in the government and lead to a big fall in yuan-denominated assets, which could mean gold becomes important for domestic investors to hedge what they may view as a greater set of risks than previously," Sudakshina Unnikrishnan, commodities analyst at Barclays said.

(Read More: Gold Crashes Through Production Cost Levels)

A significant slowdown in China could be the trigger for a change in the pattern of gold purchases as well, according to Unnikrishnan. This could lead the Chinese to move away from buying the precious metal largely during festivals, when inflationary pressures are high, or when there is a big fall in international prices, to adding gold more consistently to their portfolios.

China is already the world's second biggest gold consumer after India and has significant impact on the bullion price. On Tuesday, gold hit a one-week high of $1,260.01 an ounce on strong physical demand as Chinese consumer inflation accelerating in June boosted the metal's appeal as a hedge. On Wednesday, the metal had pared some of the gains and was trading around $1,253.30 in European afternoon trade.

Gold prices have fallen more than 25 percent so far this year, largely driven by the selling in bullion-backed exchange traded funds (ETFs).

(Read More: China's June Trade Data Much Worse Than Expected)

Going forward, even as a slowdown in China puts pressure on commodity prices, gold could buck this trend, according to Unnikrishnan.

"We expect base metals to be most affected by a hard landing, while China's gold demand could be an unexpected beneficiary," Unnikrishnan added.

Fears of further weakness in the Chinese economy were brought to the forefront on Wednesday as data showed that exports tumbled unexpectedly in June, marking its first decline since January 2012, while imports also fell 0.7 percent, going against a forecast rise of 8 percent.

(Read More: Now, China Watchers See Growth Below 7%)

Major banks and international agencies, meanwhile, have been downgrading their economic growth forecasts for China in the past month, with Nomura going as far as to call that gross domestic product (GDP) growth could fall below 7 percent in the second-half of the year, undershooting the country's official target of 7.5 percent for 2013.

-By CNBC.com's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu