There are probably as many conspiracy theories about gold as there are about Elvis, Marilyn and the Moon Landings but this time the gold bugs may just be proved right. Since the price of gold shot past the magical $1000 mark last week there is no reason to suppose that the price will just keep on rising given the level of support from the rest of the financial market. The list is long and wide and encompasses a weak US Dollar, central bank buying and a seemingly insatiable demand from China which, when combined with a strong technical picture, is suggesting that spot gold prices are likely to hold onto the $1000 per ounce price point before moving higher.
For traders and investors not familiar with the gold chart or chart reading then I would suggest paying close attention to the state and fate of the US Dollar and China. One of the reasons given for this current bout of dollar weakness has been a move back into equities as investors rediscover their appetite for risk but this is not enough to explain the recent deterioration in sentiment towards the Dollar. In addition if the FED continues to highlight that US interest rates are not going to be raised quickly this too will keep the Dollar under pressure for some time.
Then, of course, there is China whose economic relationship with the US can best be described as a marriage in which one partner is a saver and the other a spendthrift. With China sitting on approximately $2 trillion dollars of foreign exchange reserves, half of which are denominated in US Dollars, even a modest weakening of the greenback will see China’s wealth take a mighty hit. China has responded not only by indulging in a massive commodity spending spree, but also over the past 6 months has made a series of moves to try and protect itself against US Dollar devaluation. First, at a recent BRIC Summit in Russia Chinese leaders came out strongly in favour of a new reserve currency to replace the Dollar. Second China has been buying both gold bullion and mining assets in Latin America, even though it is itself the world’s largest producer at 270 tonnes per annum.
Finally, in the most extraordinary turnaround the Chinese Government is actively encouraging its citizens to buy precious metals, such as gold and silver which until 2002 was banned. Every bank in China sells gold and silver bullion bars in 4 different sizes and Chinese mining companies are also encouraging their employees to convert some of their wages to gold on payday. Gold is traded in some form 24 hours a day and there are now persistent rumours that the export of silver has been banned which, if true, could mean that gold too would be next. There are also rumours that China is looking to ban the export of rare earth metals which are essential in the manufacture of hybrid cars and superconductors.
Finally, Alan Greenspan’s comments that the recent “Rising prices of precious metals and other commodities are an indication of a very early stage of an endeavor to move away from paper currencies” would be enough to keep the current rally in gold prices going for some time to come.