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This
essay is based on the Premium Update posted November 10th, 2009
In my previous essay, apart from commenting on the current situation and
suggesting that gold did not reach a major bottom yet, I also examined the
situation in China.
I wrote the following:
Considering the high savings rate in China
(mostly in the 30% - 40% area in the previous years), gold is a logical
investment for the Chinese and it’s possible that billions of dollars
in Chinese private investment could move into gold in coming years. Already
there is talk of China overtaking
India
as the world’s largest consumer of gold.
It was
only in April of this year that the world found out that China
had increased its
gold reserves by a whopping 76 percent to 1054 tons since 2003, moving from
10th place to 7th in terms of global central bank rankings. The
Chinese government now owns 30
times the gold it held in 1990. And China
is believed to be a leading candidate to buy some or all of the gold the
International Monetary Fund still has to sell, after India
bought the other 200 a few months ago.
Keep
in mind that as China's
reserves continue to grow, it will have to purchase gold just to maintain the
small gold-to-reserves ratio of 2 % that it currently has, let alone increase
it. Therefore,
the country must continue buying gold.
Even with the increase in
its gold holdings, as a percent of China’s
total reserves, (about 2%), gold is still a pittance, mere pocket change.
Compare that with the international average of 10.2
percent held by central banks worldwide and you can understand why China
is so eager to catch up.
Last year China overtook South
Africa as the world’s leading producer
of gold and apparently a good portion of this gold is finding its way into
its central bank vault.
If the newspaper reports in the China
Youth Daily are accurate then China
plans to increase its gold holdings by another 5,000 tons of gold over the
next three to five years. That’s more than double the total annual
global production. Keep in mind that the total annual global gold production
is only about 2,500 tons per year, and obviously China
cannot buy the whole lot. With current prices, buying 5,000 tons over the
next three to five years would cost about $180 billion - still a small
portion of China’s
dollar reserves.
This
is just speculation, but let’s consider what would happen to the gold
price if China
increased its gold reserves from 2% to just 5%.
At
a bargain price of say, $1,000 gold, it would cost $55.3 billion to push China's
gold holdings to 5% of reserves.
Chinese reserves are about $2.3 trillion, and of that, $1.6
trillion, or 70% are denominated in U.S. dollars. The cost to pushing its
gold reserves to just 5%, which is still 5% lower than the global average,
would be a pittance compared to the amount of money losing its value every
day that China holds in its hands.
China’s
problem is that it can’t buy all that gold without moving the market. I
would expect China
to buy on the dips, creating a solid floor for the yellow metal and
eventually pushing the price of gold higher - much higher.
Therefore,
there are many reasons as to why the fundamental situation remains positive,
which means that the bull market is still far from the ultimate top - I
believe the latest one was just a local one, and price will sooner or later
move above it. However, from the short-term point of view the decline may not
be over yet. In the following part of this essay I will provide you with my
analysis of the silver market (charts courtesy of http://stockcharts.com.)
 
The
situation on the silver market is similar to the one in gold as far as the
overall implications are concerned. The decline has been sharp and took SLV
from 19 to 17 in a relatively short time frame, but it did not reach a strong
support level yet. The above long-term chart suggests that the next major
bottom is likely to form between $15 and $16 - in the area marked with a red
ellipse.
However,
there are signs that there will be an intermediate bottom along the way, and
this is much more visible on the short-term chart.
The
correction to the $15-$16 area could correspond to the June top, and also to
the two bottoms in September, which makes the support in this area even
stronger. Still, the short-term dashed support line has not been broken,
which may mean that silver will pause here for several days before declining
again.
The
similarity between current situation in gold and silver is even more visible
when one takes a look at the RSI and Stochastic indicators. Both of them are
just about to reach the blue horizontal line, which in the past meant that a
local bottom is very close.
Summing
up,
silver - just like gold - appears to be ending the first part of the current
decline. Naturally, the white metal may move higher at any time due to the
positive fundamental situation, so I'm not advocating being totally out of
the PM market at this moment. Detailed suggestions as far as portfolio
structuring is concerned are available to my Subscribers, along with the full version of
this essay (15 detailed charts with implications on your portfolio).
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Thank you for
reading and have a great and profitable weekend!
Przemyslaw Radomski
Editor,
www.sunshineprofits.com
Also
by Przemyslaw Radomski
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