Gold may have
moved too high too soon
. . . but whether or not the metal manages
to recoup and hold onto recent gains near or above
the $1000 an ounce level in the days immediately ahead . . . we are nevertheless looking for new highs (above $1032) in the closing months
of the year with gold
possibly at $1200 or
$1300 before the New
Key One: India
I’ve just returned from India, one
of the most crucial markets for gold with a long
history and big appetite for the yellow metal. What happens next for gold may depend most on the strength — or weakness — of Indian buying. And,
Indian buying is both price sensitive and in sync with various
holidays, festivals, and the wedding seasons.
With current rupee-denominated
prices near historic highs, many are waiting
either for a correction or evidence of
staying power before returning to the market for new purchases. And while festival and wedding-related buying is expected
later this month, the two-week
period up to September
19th is considered inauspicious for gold purchases and many potential buyers will wait until later in the month.
If gold can
remain near $1000 for the next week
or two, giving Indians a sense of confidence that the price is
not about to retreat, we can imagine
stronger buying interest sufficient to get the price
moving toward its previous historic peak and beyond into uncharted
Key Two: China
Official — but unreported
— buying on behalf of
the central bank and possibly the country’s sovereign wealth fund, the China Investment
Corporation, is being joined by growing
private-sector demand for
both investment bars and jewelry.
Press reports suggest that the Chinese government has adopted a new — more positive
— attitude toward
private-sector buying of both gold
and silver. With
China now the number one gold-mining
country, it is in their interest
to see a higher gold price as
long as demand can be satisfied by domestic mine production and scrap reflows. Additionally, it has been
suggested that the new pro-gold
policy is intended to channel speculative funds away from real
estate and equity investments.
The recently announced agreement for the People’s Bank of China to purchase from the International Monetary Fund about $50 billion in SDR-denominated,
securities has also contributed to the latest round of dollar selling
. . . and, to the extent that dollar weakness
is a plus for gold, this has also supported the early September gold rally.
Key Three: Barrick
Barrick Gold’s smart move to buy back its gold hedge
position provided a temporary booster shot that helped
propel the yellow metal through the $1000 an ounce barrier.
If I remember correctly, as of midyear, Barrick
— the world’s
largest gold-mine producer — had about 168 tons of gold outstanding
on its hedge book . . . and would have to buy back this quantity to regain full exposure to future gold-price moves.
Anticipating an announcement effect, Barrick most likely accelerated its gold repurchase
program in the days leading up to the September 7th announcement and probably paused to let the market recover
from the news and prices to back off a bit before it
resumes its repurchase program. With another tranche still to be repurchased
in the months ahead, I expect Barrick to buy into price weakness,
helping to underpin the price at moments of weakness.
Key Four: Monetary Factors
Of course, clients
and readers of NicholsOnGold know that we think
U.S. monetary policy and money supply growth are the
primary determinants of U.S. price inflation, U.S. dollar performance, and the future price of gold. Last weekend’s communique from the G20 Finance Ministers and Central Bank Governors
was a reminder that monetary stimulus is likely to stay for some time. This — along with last week’s report from the
United Nations critical of the U.S. dollar’s
roll as a global reserve asset — has pushed the dollar
lower in foreign-exchange
markets to the benefit of gold.
If you haven’t
already read the full text
of my speech
to the 6th Annual India
International Gold Convention in Goa, India last week, I suggest you take a look
for more about gold’s supply/demand situation, important changes in central bank gold policies, and implications of U.S. monetary policy.
Also by Jeffrey Nichols
Jeffrey Nichols, Managing Director of American Precious Metals Advisors, has been a leading
gold and precious metals economist for over 25 years. His clients have included central banks, mining companies, national mints, investment funds, trading firms, jewelry manufacturers and others with an interest in precious metals markets. Please check his website and register to his free newsletter by clicking here.