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China et al: Puts Floor in Gold Market
- Barrick Gold
- Central Banks
- China
- Citigroup
- Copper
- Equity Markets
- Exchange Traded Fund
- Futures market
- Global Economy
- Hong Kong
- India
- International Monetary Fund
- Jaguar
- Lehman
- Lehman Brothers
- Middle East
- Moving Averages
- NG
- Precious Metals
- Quantitative Easing
- ratings
- recovery
- Reserve Currency
- Volatility
By Dian L. Chu, Economic Forecasts & Opinions
Gold finally made its run above the magical $1,000 mark on Tuesday, September 8th, 2009 breaking free from a two-month trading range between $930 and $970 an ounce. For the third time, gold soared past the $1,000 level, causing the market to eye the precious metal's record of $1,033.90 reached in March 2008. While Citigroup is predicting a $2,000 scenario by next year due to continuing dollar weakness, a number of bullish factors, both near and long term, have converged to boost gold.
Technical Rally
Gold rallied to $997.20 an ounce last week after an earlier slide in stock markets pushed it through key technical resistance levels of $962 - $976 triggering buy orders (Fig. 1). Currently, the $1000 - $1035 is a technical pivot point for gold. In dollar terms, gold broke the 1,000 resistance, with the next hurdle of February’s peak of $1,005 followed by the March 2008 record of $1,035. In euro and sterling terms, spot bullion broke above its 100 and 200-day moving averages, both considered as buying signals.
China Effect
China has been increasingly vocal about their concern for the U.S. dollar and the U.S. bailout policies as of late, and has explicitly called for replacing the U.S. dollar as the world's reserve currency in favor of Special Drawing Rights (SDRs) from the International Monetary Fund (IMF). Beijing followed up that rhetoric by announcing their intention to purchase up to $50 billion in SDRs from the IMF. Russia and India have likewise indicated an interest in purchasing SDR-denominated IMF bonds, putting more pressure on the dollar.
Beijing also has been actively seeking to diversify its $2 trillion stockpile of foreign-exchange reserves into other assets, especially commodities. According to an April 2009 report, China has boosted its gold reserves to 1,054 metric tons, up about 76% since 2003. The increase makes China the world's fifth-largest holder of gold. Last year China ranked as the world's largest gold producer with 12.2% of world output, equivalent to 288 metric tons. Another news report suggests that the Chinese government is pushing the general public into buying gold and silver bullion, which could have a dramatic effect on the markets
From all indications, China has emerged as the driving force in the global gold market and will likely buy whenever there is a price dip, putting a floor under any correction. However, don’t expect China to bid the prices too high, as Beijing is also cautious not to “over-stimulate” markets.
Inflation/Dollar Hedge
Gold has attracted many investors since the collapse of Lehman Brothers last year. Growing investor concerns that the sharp rise in major country debt levels and aggressive quantitative easing will impact sovereign ratings, currency values and potentially cause inflation to rise sharply appears to be causing investors to raise their holdings of hard assets.
The agreement last week by the G20 to keep the economic stimulus flowing until the global recovery was well entrenched led to rising speculation across markets regarding central banks’ exit strategies, as well as dollar weakness. Hedge funds have bought heavily into gold as a bet against the ability of central banks to stimulate economic growth without triggering inflation.
Risk Aversion
Asset-diversification demand for gold and other precious metals by nervous investors amid unstable equities markets has contributed to gold's latest rally. Historically, gold has an inherent inverse relationship with the U.S dollar as well as equity markets (Fig. 3). Gold has tripled in value over the last seven years, vastly outperforming equities, and is now benefiting from uncertainty over the strength of the economic recovery. Investors are buying gold as a diversification from risk, while those who believe it is sustainable choose the metal as an inflation hedge.
Global monetary authorities have long held gold in their reserves for economic security in addition to asset diversification. Emerging sovereign-wealth funds are buying gold as well due to volatility in their economic and/or political environment. When these sovereign-wealth funds are not actively purchasing gold they are at least reconsidering the level of gold in their reserves.
Supply & Demand
Distrust of any paper investment due to the global economic crisis has pushed up gold demand when global gold production is falling (Fig. 2). According to the World Gold Council's Gold Demand Trends report for the second quarter of 2009, investment demand for gold rose 46% from earlier in the year but was down by 9% year-over-year. Demand for gold exchange-traded products also rose with a total net inflow of 1.9 metric tons for June 2009, compared with net outflows of 38.1 metric tons a month prior.
Fundamentally, lack of exploration expenditure in the 1990s, coupled with the inherent delays between discovery and production mean that the gold supply will remain inelastic and is likely to reduce slowly over the coming few years.
To Hong Kong, with Gold
Hong Kong is repatriating its physical gold reserves from London to high-security vaults at home, and it is inviting the region's central banks to store their bullion there. The move raises a potential price-settlement hub in Asia to rival the New York and London daily spot-price fixes. The Hong Kong Monetary Authority is also targeting a new gold bullion ETF using the new vault as a repository, which would remove yet more physical supply from the market.
De-hedging by Barrick Gold
Citing a bullish outlook for gold, Barrick Gold (ABX) indicated that it will eliminate all of its gold hedges and raise about $3.5 billion in a share offering to help pay for the move, giving the company full exposure to changes in the precious metal's market price. Barrick's dehedging & buying since the end of the second quarter reportedly had been a major contributor to the nearly $100 rise in the price of gold over that period. To investors, this move spells a very bullish golden outlook from the world’s largest gold producer.
According to an August 2009 analysis by Société Générale, the majority of the global hedge book is still under the control of two main players, Barrick Gold (ABX) and AngloGold Ashanti (AU). Thus, there remains significant scope for the two companies to act as a swing factor in the world’s gold market.
Seasonal & Regional Effects
September is historically a strong month for gold, partly because it precedes the wedding season in India, when jewelry demand typically picks up. Although jewelry demand for gold sank to a five- and-a-half-year low in the second quarter of 2009, gold is still considered the best possible protection against upheaval, both political and economic in much of Asia, the Middle East, and the Indian subcontinent.
Gold Rush to Continue?
Even with resurging investment demand, gold's recent rally has been largely technical, amid weakening physical demand. Nevertheless, China, inflation/dollar hedge, risk aversion and supply/demand are the main longer term bullish factors underpinning gold prices. Dollar movements and external economic factors will continue to greatly influence precious metals' prices. While a resurgence of inflation fears would ultimately skyrocket gold prices, it is not a likely scenario in the near-term, as we are still pretty much in the deflationary cycle.
Technically, if gold breaks the $1,035 point, expect to see a lot of new funds inflow and short covering bidding prices even higher. However, if the yellow metal fails to break higher, there could be a sell-off from profit taking and/or panic. Fundamentally, a sustained rally in the gold price beyond $1,000 remains doubtful, as commodity prices in general are overbought, and there could be room for a correction.
Therefore, from all the factors examined so far, gold is likely to remain range-bound around $900’s to $1,000’s in the near-term, while markets and the global economy stabilize.
Sector Strategy
As discussed, since gold prices have a virtual floor built in, buying on the dip at around $940 price range should be a good strategy for the physical futures market.
To get the upside on gold with less risk and volatility, equity investors could focus on gold mining companies such as Freeport-McMoRan Copper & Gold (FCX) and NovaGold Resources (NG) with a favorable gold production cost structure. Jaguar Mining Inc. (JAG), one of the very few unhedged miners, could be worthy of a look as well.
For new gold ETF investors, ETFs like the SPDR Gold Trust (GLD) and Market Vectors Gold Miners (GDX) offer good inflation protection. Investors already own gold related holdings could consider diversifying to precious metals ETFs such as PowerShares DB Precious Metals Fund (DBP) or broad commodity ETFs like DB Commodity Index (DBC).
By Dian L. Chu, Economic Forecasts & Opinions
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It should read........
"If you don't hold it, you don't own it"... Ponce
Credit where credit is due.....thanks........Ponce
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Learn form the most knowledgeable persons like Jim Rogers, Peter Schiff and Marc Faber. And never forget: Mainstream financial analysts did not saw the 2007-8 events coming. They don't see the unfolding commodity boom coming either. So watch out for biased opinions, listen to those few who are knowledgeable and you will outperform.
Whats funny AND sad is that some people are PUT OFF gold by gold bugs!
It is like a reverse ad-hominem logical fallacy.
Some people don't like 'how gold bugs talk', or some variation there on, and therefore, they 'are talking shit', and are wrong...
It happens in sports too. You dislike a MMA (UFC) fighter because his fans rate him too highly/unrealistically, and because of annoying fans, you hate the fighter... HMMMMM...
http://911research.wtc7.net/wtc/evidence/gold.html
comex gold and silver is stolen during the 911 event. who did this? and how?
Come on $2000... let Citigroup be write on this call...
Why is the word "confiscation" never mentioned in these threads?
Don't get me wrong, I own physical gold - just wondering how useful it will be when it becomes illegal to own.
Lots of people held their gold through comrade Roosevelt's gold seizure. There were no searches of homes; people were expected to turn their gold in. Safe-deposit boxes are not recomended; it's my understanding that these were sealed, to be opened in the presence of an IRS agent.
for a more sober and dour view of barrick's predicaments i am pleased to pass along this link to antal fekete - master of gold...
http://www.professorfekete.com/articles/AEFHasBarrickBeenBarrickedByTheU...
he has filled in some gaps in my understanding and confirmed my worst fears - i.e. barrick simply can't cash
out of the "hedges" and pretend it didn't happen...
looks like it is on the hook....and the sad thing is that they were strongly advised against pursuing such a foolish
strategy....fekete thinks barrick may be forced into liquidation.....
stay tuned for more exciting tales in our next underdog episode....
I hope Barrick chokes.
Me too, part of my hedging strategy is short forward-selling miners which includes ABX.
Check out Bob Chapman's latest at globalresearch:
Derivatives Collapse and the China Gold and Silver Markets
http://www.globalresearch.ca/index.php?context=va&aid=15126
Inflation protection? Are you joking? What about deflation protection.
monetary inflation proceeds apace (though slowing)....it is true that
real estate has crashed from bloated levels
but price inflation is a real problem in other places
of cpi...
even with the so-called (falsely) deflation
that we have, gold has held its value over the
past year....
the inflation / deflation debate is such a false
issue used by confused people to confuse other
people when it comes to gold....
the real issue is the gold basis....it is vanishing
and near backwardation - in fact it has been
in backwardation at various times over the past year.....until you get that
then you don't get monetary science and you don't
get the dangers we face with the crapulent
debt based fiat currency.....
The author gives a good review of gold news, then goes on to treat it as an "investment" and make recommendations using traditional investment-like vehicles.
Re: Barrick. The distinct possibility exists that Barrick did not de-hedge. Were Barrick to de-hedge, it would have to deliver gold into the market, some 9 million ounces. Since Barrick can not produce this amount of gold in a timely manner, it chose to deliver paper instead. In order for Barrick to de-hedge, it would have to buy 9,000,000 ounces of gold on the market (somewhere), and the gold market would react with higher prices to this substantial increase in demand.
The holders of the other side of Barrick's hedges are not receiving the gold they contracted for; they are receiving paper, and depending on the terms of the agreements, are taking on the market price risk themselves. In other words, it appears that Barrick is defaulting on its hedges. Now the holders of Barrick's hedges must go into the market themselves and buy gold, taking the risk of paying higher prices if they want physical gold and not (defaulted?) paper promises.
Gold bugs have a saying: if you don't hold it, you don't own it. Gold has been money for 6,000 years. Its value is recognized worldwide. Gold is NOT an "investment", it is a currency; increasingly, it is being recognized as a currency that will retain its buying power while the buying power of all paper instruments drowns in the flood of global central bank "monetary easing" and runaway printing presses.
There is a great amount of debate as to whether or not certain ETFs are actually equivalent to owning precious metals. I strongly suggest, if you must use precious metal ETFs, use one that is physically outside of the U.S., uses allocated storage, provides independent auditing, has a stated policy of never lending gold, and isn't managed by one of the big Wall Street cheater banks.
Your first consideration should be given to actually owning physical metal yourself, in allocated storage at a trusted depository or some other secure storage (Bank of Gaea). The problem of not physically holding gold yourself is one of encumbrance. Unless you hold it in your hand you have no idea whether it is encumbered, or even how many times it is encumbered (yes, fractional-reserve gold lending).
hear hear!
i said the same about barrick last night - in fact
this whole article looks like my posts :-o....they
have (technically) defaulted...that is huge news...
you must posess the gold....that is the only way
to force proper appreciation of gold...otherwise
you play the chump...
gold is indeed money and it floats just like
other currencies....
It's like a game of tennis with a hand grenade. When contracts reach maturity and China demands delivery, who's gonna be left holding the paper bomb? Which central bank is gonna come to the rescue with a sudden gold sale?
Roll up, roll up, place yer bets!
They Chinese avoid the problem they had with the big Iron buy namely because they are the only big buyers on the market everyone is watching them and prices go up rapidly. The best thing the Chinese can do is not to buy to much in one time but wait everytime prices fall back for the next round of buying. Have to admit that gold is bit of an other trading "environment " than Iron ore but the same rules can be aplied here, just buy a little each time and wait till prices fall back to buy more. This could be an interesting game between gold suppressors and China the gold buyer.that is precisely what the chinese are doing -
they are buying on dips in gold because
they recognize that they are the bull
in the china shop....
AB, I like your report. Especially when contrasted against the Wall st bank reports written by "CFA's." You've got good charts, reasoned arguements & rational choices. Well done. I'm buying CEF a closed end real bullion fund in Canada. No paper for me of any stripe or kind.
I think the price of gold will hold pretty steady now until we see the next pullback in the market. What do you all think? Is $1,300 a reasonable new target?
More news out of China: China's largest bank to set up precious metals department http://tr.im/ymWB
1300 is about the most conservative estimate
i have seen....roger weigand thinks 1260....
of course there are others who are bolder
with daily reckoning suggesting 2000 usd as
more realistic...
in any event 1000 is under priced.
Get gold in the deflation, won't be available when inflation catches.
Quietly large estates are moving to gold. When that paper currency catches fire it will collapse fast.
Prepare early, when the smoke alarm hits, it'll be too late.
there will be no deflation on gold....
it is fantasy to suppose that gold is an ordinary
asset....it is money and the fiat debt based
currencies are doing their death dances....
all indications are that it is going into
permanent backwardation which is why the large
estates are going into gold....i have seen
that phenomenon with my own eyes...while i was
trying to buy gold some time ago the dealer was
getting calls for gold bricks from individuals - not the itty bitty coin crap i was doing....
new gold ETF is supposed to hit the market as well, SGOL. Will store physical gold in vaults in Zurich & aims to track bullion prices.
Yeah, and JPM is the custodian. No thanks.
lol
paper gold is more baffle them with bullshit
strategy....these fraud infested funds are
a giant money hole....they could no more deliver
on the goods than dick bove could deliver an
accurate buy signal for lehman brothers....
anyone holding paper gold is a chump...trading
it on a short term basis may be safe but should
only be done with expendable money....
Gold, the next bubble. China is mining the sorry deposits it has. These deposits were not worth mining prior to this current currency problem. China has 1,054 tons of gold, the US has 8,133. China does not have the profitable deposits in the ground to ever be a player in gold. Making its people buy gold and silver, if that is not communist I do not know what is.
Why would anyone believe anything that Citi Bank says?
China schmina stupid! :)
i can't comment on the profitability of the
chinese deposits but that is a non sequiteur....
if you have information on the profitability or
quality of chinese deposits, please supply a
link....
i also couldn't vouch for either the chinese
or usa gold reserves.....in all likelihood the
usa has far far less than stated due to incessant
drains on the gold since the london gold pool
of the 1960s continuing to today with gold
leases which has been stated policy by greedscam....
i am also unaware of the chinese forcing their
people to buy gold or silver....if china is doing
so it would be par for the course - just like
dictator fdr forced americans to accept the
utterly worthless federal reserve note...
WaterDog.
how are the hydroponics growing this season???
China has sorry deposits??? they are now the largest Gold producers. sorry.
The US has how much?? Can't have much left if they will not allow a proper audit. sorry
Making their people buy gold & Silver. really?? or are they just suggesting its a better buy than soft, dry, monetary "Sorbent". sorry
At least you are right about CitiWank.
well, even a broken clock is correct twice a day (Citi).
The idea is that China has stated its intention of taking the yuan international and fully convertible/floating. To do that they need massive amounts of gold (hard assets) to back up the paper - they don't have much right now. Once they take it international it does not behoove them to play the same game. The game (gold lease/carry trade) is not played to make money. Its played to extend the time that the dollar stays in existence as the reserve currency. Otherwise it would have crashed long ago and seen huge amounts of inflation.
The real question is whether you buy now, when its cheap, or wait a year or more when it keeps getting progressively more expensive?
And everything is a bubble at some point. Its called cycles and its funny how they keep happening as humans go through periods of panic and euphoria. Gold is in an upswing with a long way to go. It will hit bubble status at some point just like the stock market, housing, treasury, car, consumer spending, etc... The key is to get in early enough that when the bubble actually happens (blow off stage) you've made your money and get out to the next really undervalued asset that got trashed recently because it was in a bubble.
"the US has 8,133"
Are you sure? (ROFL).
Why would you believe anything the US Government says? Do we really have 8133 tons of gold? Please provide a link to the latest third party audit of this holding. Or should I just take Timmy G's word that its there?
Asiablues,
You give a good overview what is going on with gold.
Let me add some points: Gold’s poor cousin, silver, is doing well too.
Gold’s supply and demand picture would look more pronounced when you add central bank selling and the lack thereof lately as supply.
to mish, and karl and i hate to say it but you too, there rick santelli, you snake in the grass, (yeh we heard your ideas on the noble metal yesterday), we say to you all,..........
HOW DO YOU LIKE ME NOW!!!!!
Good article AB. Although my take on ABX is that they dehedged, not from choice, but from necessity. China's moves caused an allocation cascade in paper metal that flowed back to the source (ABX forward sales). They had to deliver pronto and took the option of diluting shareholders to cover (with some bullshit PR spin).
But it seems they failed to find physical so they covered with paper, kicking the can down the road, or offloading to another player. If that pattern keeps going then there is going to be a big default or a CB stick-save at the end of the month on the COMEX. China just has to keep demanding physical and this paper game is going to be blown wide open. If so then gold and silver will *really* go to the moon.
Although, having watched the PM carry trade in action for years, the cynical side of me believes that China, once it gets its physical, will simply play the same game and flood the market with more paper (its ETF would be part of that), taking prices straight back down.
But then the strategic side of me says that cleansing out the PM shorts would fit the BRICs plan perfectly to issue a new world reserve currency. It would make total sense.
This is currently the most interesting story on my radar.
Perhaps it would behoove China's bid for a new currency to keep gold as high as possible AFTER they build their physical. All the BRICs for that matter.
There is only so much gold in the vaults, and a whole lotta paper is probably going to be backed, in some way, with the gold China and the BRICs have in hand. Assuming, of course, that there is a real push to replace the dollar.
http://www.marketintelligence.gold.org/news/2009/09/03/story/12867/gold_...
hong kong wants its gold back from the city of london, just like the germans want theirs back too.
as does uae, switzerland
it's a result of the recognition that uk
and the usa have been leasing gold - including
that of other sovereigns....
he who holds the gold makes the rules.
http://zionistgoldreport.wordpress.com/2009/07/15/greenlight-capital-dum...
greenlight capital cashes in 500M in GLD stock and takes delivery on physical gold.
hmmm
so now the crooks are dumping GLD and getting the real thing, while the getting is good. This guy , Einhorn, is mentioned a lot in the aricles and discussion material over at deepcapture blog. Gee I wonder why? So when the crooks start cashing in their chips, anyone long equities had better pay close attention. something is going on now with gold and silver and for many it spells nothing but trouble.
Thanks.
Well-reasoned & clearly presented.
Junior gold producers look like the best bet now.
Can you post the Mike Duvall video (California assembly confession on CNN right now) ?? Its amazing what this country has become!! Imagine confessing your affairs during session !!