There are probably as many conspiracy theories about gold as there are about Elvis, Marilyn, and the Moon landings, but this time the gold’s mistakes can be shown to be right. Given that the price of gold spiked past the magic $ 1000 mark last week, there is no reason to assume that the price will continue to climb given the level of support from the rest of the financial market. The list is long and broad, encompassing a weak US dollar, central bank purchases, and seemingly insatiable demand from China that, when combined with a strong technical picture, suggests that spot gold prices are likely to remain in the low range. price of $ 1000 per ounce. point before moving higher.
For traders and investors unfamiliar with the gold chart or chart reading, I would suggest paying close attention to the status and fate of the US dollar and China. One of the reasons given for this current episode of dollar weakness has been a return to equities as investors rediscover their appetite for risk, but this is not enough to explain the recent deterioration in sentiment towards the dollar. Furthermore, if the Fed continues to stress that US interest rates are not going to rise quickly, this will also 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 spender. With China holding roughly $ 2 trillion in foreign exchange reserves, half of which are denominated in US dollars, even a modest weakening of the dollar will take a heavy hit on China’s wealth. China has responded by not only allowing itself a wave of massive spending on raw materials, but also over the past 6 months it has made a number of moves to try to protect itself against the devaluation of the US dollar. First, at a recent BRIC summit in Russia, Chinese leaders came out strongly in favor of a new reserve currency to replace the dollar. Second, China has been buying both gold bars and mining assets in Latin America, despite the fact that it is itself the world’s largest producer at 270 tons per year.
Finally, in the most extraordinary change, the Chinese government is actively encouraging its citizens to buy precious metals, such as gold and silver, which until 2002 were prohibited. All banks in China sell gold and silver bars in 4 different sizes and Chinese mining companies are also encouraging their employees to convert part of their wages into gold on payday. Gold is somehow traded around the clock and there are now persistent rumors that silver export has been banned, which if true could mean gold would be next as well. There are also rumors that China is seeking to ban the export of rare earth metals that are essential in the manufacture of hybrid and superconducting cars.
Finally, Alan Greenspan’s comments that the recent “Rising prices for precious metals and other commodities is an indication of a very early stage in an effort to move away from paper currencies” would be sufficient to maintain the current rebound in gold prices for some time. come.
