|
 One question that has not been
asked sufficiently is, “How can China buy well over 2,000 tonnes of gold
without sending the gold price rocketing?”
In the U.S. people believe that the gold price will fall
even further in 2014 despite indications that Chinese demand will continue at
current high levels if not rise even more. This is because U.S. investors
have been selling gold to move into the rising equity market. With the
developed world focused on events in its own part of the world it is assumed
that their influence will dominate the financial world including gold. But
this ignores events in the emerging world and their hunger for gold.
With ‘normal’ annual supply to the gold market around
4,000 tonnes annually you would have thought that such a heavy Chinese demand
would have propelled gold prices higher. But it didn’t. We have explained why
in earlier articles last year. We will write more about this in the future,
but in this article we will look at just why the Chinese prefer to see low
prices continue.
There are two primary reasons why they want low prices to
continue:
1)It encourages Chinese retail demand. - With Chinese
middle class numbers set to rise considerably as the government there pushes
their growth emphasis to the service sector, more and more Chinese will save
and a good proportion of that will go into gold. So low gold prices will
accelerate the volume of gold bought. Higher prices lower the overall volume
of gold bought. The nouveau riche of China will invests in relation to the
size of their disposable income, so the more gold they can afford with that,
the greater the total volume bought.
2)It has increased the supply of gold to China. - Low
gold prices has discouraged developed world demand and encouraged more
selling of gold in 2013, making a greater volume of gold supply to be made
available for the Chinese to buy as it implies that the rest of the world’s
gold demand remains subdued. Add to this is the choking off of Indian demand
since August 2013, taking the now second largest gold buyer out of the
market. Over a year this would remove 800+ tonnes of demand from the market.
As simple market theory tells us, the greater the demand
over supply is, the higher gold prices will rise. So how can one buy gold in
huge quantities without driving up gold prices? The answer has to be by
buying gold outside the market and not buying in the market where gold prices
are set. Another answer is to ensure that where one does buy in a market
where prices are set, one buys “on the dip”. In other words don’t buy when
prices are rising, buy when they are falling and only take the gold that is
on offer in the market.
Market Fragmentation
We know that China has and is buying gold mines and can
direct the gold of those mines straight to China.
We also know that many gold producers, such as South
Africa, are not bound to sell their gold to the London market or direct it to
any market [such as they sold to the ‘gold pool’ in the seventies] in
particular but can sell to anyone they want.
Traditionally, bullion banks made buying commitments to
certain mints and producers to supply gold on a long-term basis, but today
they do not have the same hold on newly mined gold, which can go to any solid
buyer. A client like a non-banking Chinese importer for large quantities over
a lengthy period is as attractive a client now as the bullion bank.
The price paid to the supplier is referenced to the
market prices at the time of delivery. Because the gold does not pass through
the London gold market it no longer plays a part in determining prices. The
more gold that is bought that way [off market], the smaller the London/New
York market becomes.
This leaves market like London and its five bullion banks
pricing gold on the basis of only part of the global market, so not truly
reflecting global demand and supply. If both demand and supply in the
traditional markets, such as London, is lackluster the gold prices set there
will continue to look weak, despite the massive and rising demand elsewhere.
Indian demand is routed through London, so the loss of
such a big buyer knocked the stuffing out of London’s demand. Add to that
U.S. selling [also routed through HSBC to London] and it is no wonder that
prices fell in 2013. Should Indian demand return once more then gold prices
will turn higher.
The loss of traditional demand from India and the
additional supply of gold from the U.S. has supported falling or stable low
gold prices in London and will continue to do so, ignoring Chinese demand.
We have no doubt that China will continue to buy in a
way so as to be a neutral influence on gold prices in 2014.
Agreement between the U.S. and China for lower gold
prices?
Some commentators believe there is an agreement between
China and the U.S. to suppress gold prices. It is a matter of history that
the U.S. does not want gold to be seen as money, but wants the world to
believe that the dollar is. China is moving towards elevating the Yuan to a
position of a global reserve currency. It appreciates the monetary turbulence
that this will bring as the Yuan challenges the dollar and becomes part of a
multi-currency reserve currency system. That’s why it is buying gold as a
factor that will give the Yuan global credibility. China, once it has
acquired a certain level of gold reserves [it will keep increasing them after
this point is reached], has every interest in seeing the gold price rise to a
point where it is a reflection of true value, whereas the U.S. does not.
Consequently, the two do not have the same objectives or
interests as the other. Hence, there can be no agreement between the two to
suppress gold. Rather, China is taking advantage of the current state of the
gold market and the persistent selling of gold from the U.S. based gold
Exchange Traded Funds to acquire the gold that is being sold ‘on the dips’,
so as to not drive gold prices higher.
In the next article we will look at how long China can
keep their influence on the gold price as little as we see now.
Subscribe @
www.GoldForecaster.com
www.SilverForecaster.com
Legal Notice / Disclaimer
This document is not and should not be construed as an
offer to sell or the solicitation of an offer to purchase or subscribe for
any investment.Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter
Spina, have based this document on information obtained from sources it
believes to be reliable but which it has not independently verified; Gold
Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina make no
guarantee, representation or warranty and accepts no responsibility or
liability as to its accuracy or completeness. Expressions of opinion are
those of Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina
only and are subject to change without notice. Gold Forecaster - Global Watch
/ Julian D. W. Phillips / Peter Spina assume no warranty, liability or
guarantee for the current relevance, correctness or completeness of any
information provided within this Report and will not be held liable for the
consequence of reliance upon any opinion or statement contained herein or any
omission. Furthermore, we assume no liability for any direct or indirect loss
or damage or, in particular, for lost profit, which you may incur as a result
of the use and existence of the information, provided within this Report.
|
