GOLD´S ACTION LAST WEEK STRONGLY POINTS TO CHINA / MACLEODFINANCE

Gold’s action last week strongly points to China.

The indications are that in the face of increasing Chinese demand for gold western capital market selling simply cannot absorb it.

MACLEODFINANCE

 

The price action on Thursday and Friday strongly hints that it was demand in China that spilled over into morning prices in Europe. 

Furthermore, on Friday morning Eastern time when Chinese speculators were gone for the weekend, prices fell from $2377 to close at $2360 pointing to western market-makers taking the opportunity to claw back some short positions.

Whether gold prices rise in coming weeks will depend largely on demand from Asia/China continuing. 

Some analysts are dismissing this demand as a temporary feature, based solely upon the Chinese predilection for gambling. 

I’m not so sure this is correct.

There are probably far more individual Chinese gold speculators than in Europe and North America combined. 

Where the West differs is in the hedge fund and bullion bank communities which until recently have battled it out between themselves, setting paper prices on Comex and London. 

And genuine investors in western capital markets have been reducing their interest generally, reflected in the chart below, of a major representative ETF (SPDR) and the gold price.

SPDR is not the only ETF reflecting declining interest in western capital markets. 

The point is that weak holders freeing up bullion for the markets are a diminishing breed: there is very little bullishness reflected in gold ETFs despite the gold price having strongly risen this year. 

If anything, it has continued a trend of declining relative bullishness evident over the last fourteen years.

So much for the non-speculator positions. 

My next chart shows speculator positions on Comex.

At 527,000 contracts, the total of Managed Money (hedge funds), Other Reported, and Non-Reported categories may be described as healthy rather than excessive. 

This gives room for more speculative demand should circumstances trigger it. 

And a decline in these positions of 100,000 contracts into oversold territory is almost certainly insufficient to offset Chinese demand, should it continue to be a factor.

Now let us put ourselves in the position of a Chinese speculator. 

From his position the following factors might influence his thinking:

·      Priced in yuan, gold is rising, making it an attractive buy.

·      Property and the stock market appear unattractive alternatives relative to gold.

·      With access to foreign currencies denied, gold is the principal hedge against a falling yuan.

·      It is official policy to sell dollars and the Peoples’ Bank is selling dollars to buy gold.

·      Banks are offering even small investors gold bank accounts. Bear in mind the savings ratio in China is estimated at 40%, which suggests that off-the-scales demand is possible.

It is hardly surprising that sentiment in China, and to a lesser extent perhaps in other Asian jurisdictions favours gold. 

And it would be a very brave bear in western capital markets who thinks that this speculative demand is temporary.

The icing on the gold cake will be when westerners finally stop selling gold into a rising price and decide to buy. 

The effect is likely to be even more pronounced in silver, which is being consumed rather than hoarded.

Conclusion: This is just the start of bull markets for gold and silver.