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China holds the gold price key

If China wants the gold price to turn around, it has all the ammunition available to bring this about.

Those gold bug optimists who reckoned the likely Swiss Gold referendum ‘No’ vote had already been discounted by the markets were initially proven wrong. With some forlorn gold hopes hanging on for a surprise ‘Yes’ vote, the result was going to produce a knee-jerk reaction downwards as it will have perhaps prompted more selling from exasperated gold investors. 

As the almost certainty of a ‘No’ vote became apparent, the gold price dipped quite sharply in late trading on Friday, and this morning, now the referendum result has become fact with the ‘No’ vote comfortably prevailing, it initially moved another few notches downwards, but has since made something of a strongish recovery back to the $1,170s. Perhaps our recent comment about beginning to see some momentum in gold was justified after all! But as usual, time will tell.  We could be in for a volatile few days.

See: Central bankers’ love-hate gold relationship 

The question now though is how fast and how far could gold fall further, if it does, before the next resistance level kicks in. Will we perhaps get down to WaveTrack International’s predicted $1,100 level, or perhaps Goldman Sachs’ $1,050 or lower. Gold mining company executives will be reconsidering their options – if indeed they have any. After all well-respected commentators have noted that much of the gold mining industry is already under water at $1,200, let alone $1,150 or lower. Even those who have felt that using a gold price of only $1,000 to calculate whether their operations are viable or not at lower gold prices will be looking to re-assess where they stand at $900 gold. Some may well give up the battle to stay afloat.

Is there thus any hope out there for the gold investment sector? The pressures driving the gold price downwards have been enormous, although as we have pointed out on a number of occasions, demand already appears to be exceeding supply, probably comfortably – and at $1,100 gold or lower the supply gap is likely to continue to widen as scrap sales dwindle away, the lower price stimulates new purchases in the East and new mine production falls as some miners bow to the inevitable and have to shut down lossmaking operations. 

It may not quite be that simple though. Those miners that may have high grade production and higher grades through the mill at full throughput means, in some cases, higher gold output. But the scope for this to be implemented becomes more and more difficult as time progresses and this can only be a short-term measure – and also leads to reducing values longer term for those which survive. And of course, the scope for high grading among many of today’s massive tonnage, low grade operations, and some others too, is strictly limited.

Is there any light at the end of the tunnel? Maybe. But is this just clutching at straws? Under the Goldman scenario, the answer is probably no until the bankers feel they have driven prices down sufficiently to buy back into the market and make mega profits on a reversal in the price trend. But this depends on how much of the recent strange activity in the gold futures markets is profit-driven, self-serving, or at the behest of higher anti-gold powers who see a rising gold price as a threat to the global economy. Certainly in the case of the Swiss referendum, the vast and totally unprecedented propaganda levels brought to bear on the population by the Executive and the Swiss National Bank, suggested that the prospect of a ‘Yes’ vote could just not be allowed to happen. It will be interesting to hear the views of ‘Yes’ campaigner Egon von Greyerz at the Mines & Money meeting in London this week. The ‘No’ campaign was playing with loaded dice!

But if WaveTrack International’s Peter Goodburn is correct in his analysis, a gold price fall back to $1,100 will be rapidly followed by perhaps a two- to three-year recovery taking gold, silver and the other precious metals to new highs, resulting in huge multiples in gains in gold stocks. This is all based on Elliott Wave data, which has been remarkably consistent over the years in matching price patterns for virtually any commodity. Although if this can hold true in the face of the current unprecedented interference in the gold futures markets obviously remains to be seen.

See: Elliott Wave analyst sees big gold and silver price surge ahead

However, even the WaveTrack prediction probably needs something to kick-start the recovery process and we still feel China ultimately holds the key to the gold price. Despite the mainstream media keeping on telling us Chinese gold demand is slipping, the latest week’s withdrawals from the Shanghai Gold Exchange are still over 50 tonnes – 52.5 tonnes for the week ending November 21 to be precise. This means our recent estimate for Chinese demand this year, as represented by withdrawals from the SGE, remains on track to reach close to 2,100 tonnes. It’s already hit 1,829 tonnes and if the 52 tonne/week level is maintained until the year end should reach over 2,090 tonnes plus as the Chinese New Year approaches – a very strong time for Chinese gold purchases.

But should China want to make a specific impact on the gold price it has all the ammunition it needs to do so. There is a very strong belief among many analysts that China is building its gold reserves to at least match, or perhaps exceed those of the US, and if it should come clean and announce a major increase in its reserves – the last time it did so was nearly six years ago – this would give an immediate massive fillip to the gold price and is a scenario those traders short gold must dread. 

Or, even if this is not the case, should China wish to see the gold price rise in order to keep its citizens who have purchased gold happy (they were effectively encouraged to do so by the government-owned banks) or to embarrass the West, it has enormous foreign exchange reserves available to intervene in the market and buy physical gold sufficiently to turn the markets around strongly.  

Gold is actually seen as in short supply anyway in the West, which is why the gold believers cannot understand recent price movements which seem to fly in the face of economic supply/demand logic and a China boost could have a very rapid strong upwards effect. Western governments may be wise not to tweak the tail of the dragon as it certainly has the wherewithal to play the gold card and throw global markets into turmoil.

 

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