Has gold moved on to a secular shift?

September 17th, 2009

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Since we wrote Explosive gold price movement ahead. But up or down? more than 2 weeks ago, gold prices had moved up from US$953 to US$1020 at the time of writing. In terms of Australian dollars, gold prices had not moved much. This break-out of gold prices from a narrow trading range had sparked excitement and derision among the proponents and opponents of gold. But beneath all these chatter and excitement, there are a few interesting trends that we would like to highlight to you:

Declining central bank gold sales
For decades, central banks were net sellers of gold, culminating in the Bank of England’s sale of half its gold holdings in 1998 at the bottom (‘perfect’ timing for the British right?). But over the past couple of years, European central banks are getting less keen to sell their gold. Between 2004 and 2009, under the Washington Agreement, central banks can sell at most 2500 tonnes of gold on a net basis. But only 1867 tonnes were sold. In September this year, another 5-year agreement was signed, permitting at most 2000 tonnes of gold to be sold. In 2009, only 140 tonnes of gold were sold. So, among the signatories of the Washington Agreement, there is a falling trend in the quantity of gold being sold by central banks. At the same time, the central banks of emerging countries (e.g. Russia) are making clear their intention of increasing their gold reserves. For example, Russia announced their aim of increasing their gold reserves from 2% of total reserves to 10%. According to specialist gold analyst Jeff Nichols, the world may be at a turning point whereby central banks is moving from being net sellers of gold to net buyers of gold.

China increase its gold reserves through domestic production
Last year, China suddenly announced that they had increased their gold reserves by 76% since 2003 (454 tonnes) through domestic purchase of their gold production. Over that time, China became the world’s largest gold producer. It is reported that China exports none of their domestic gold production and even banned the export of silver.

Hong Kong recall its gold from London
Recently, Hong Kong recalled its physical gold from London (see Hong Kong recalls gold reserves from London) to be stored in its own storage depository facilities. It is widely believed that this will help Hong Kong be a regional trading hub. There are marketing plans to convince Asian central banks to transfer their gold reserves to Hong Kong. At least one company is planning to launch a gold ETFs? that stores its gold in Hong Kong’s new depository.

Chinese government pushing gold and silver to the masses
Before 2002, it is illegal to own gold in China. Today, the situation is completely reversed. As?China pushes silver and gold investment to the masses reports,

Apparently China is pushing the idea of buying gold and silver for investment purposes to the general population in the way that Western television sells soap powder.

The report notes that China’s Central Television, the main state-owned television company, has run a news programme letting the public know how easy it is to buy precious metals as an investment.? On silver investment the announcer is quoted as saying ” China has introduced its first ever investment opportunity for silver bullion. The bars are available in 500g, 1kg, 2kg and 5kg with a purity of 99.9%. Figures show that gold was fifty times more expensive than silver in 2007, but now that figure has reached over seventy times. Analysts say that silver has been undervalued in recent years. They add that the metal is the right investment for individual investors and could be a good way to cash in.”

This has fuelled a belief that since the Chinese government are convincing the masses to buy gold, then they will not allow gold prices to slump in order not to alienate the masses.

China openly expressed its lack in confidence in the US dollar
China, with US$2 trillion of US dollar assets are not happy with the Fed’s policy of currency debasement. Six months ago, Chinese Premier had already expressed his worry of the US dishonouring its debt through the path of monetary inflation (see Nations will rise against nations). In this article, Cheng Siwei, former vice-chairman of the Standing Committee and now head of China’s green energy drive openly expressed the Chinese government’s dismay at American monetary policy. He said,

We hope there will be a change in monetary policy as soon as they have positive growth again.

If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies.

Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets.

This is leading many to believe that China will scoop up to buy gold at the dips, thus a ‘put option’ for gold.


This is getting interesting. Notice the two opposing forces (by two different groups of big boys) at work?

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