Don't Bet on Gold Demand Based Rally

iSPYETF

This article was originally published on September 10, but don't file it away as outdated.

I used my recent visit to Germany to dig for some unique perspectives not commonly dispensed domestically.

Here is one about a new gold rush – and rising gold (GLD) prices - caused by China.

The Handelsblatt, Germany’s economy and finance newspaper, featured this headline on the August 22 front page: “China Can’t Get Enough Gold” (all the information below is taken from this article).

With 1,054 tons of gold, China (FXI) sports the fifth largest gold reserve among nations. This sounds like a big number, but China’s gold holdings makes up only 1% of its total assets.

It is unknown how much gold China’s central bank is buying, but it’s certain that the Chinese government wants to beef up its gold stake.

Chinese citizens are also drawn to the shiny metal, as the stock market is considered volatile and citizens are not allowed to invest outside the country.

Does China Plan to Topple the US Dollar?

It is speculated that the communist leadership is pushing for a long-term currency reform as it amasses enough gold to return to some form of gold standard.

Even though China is the world’s biggest gold mining (GDX) nation (China mined 370 tons of gold last year), according to the Handelsblatt, 798 tons of gold have been shipped from London to China in the last six months. 

The metal is melted down in Switzerland and then discreetly moved to China.

According to China’s gold council, China is on track to surpass India as the world's biggest gold consumer this year. 

Higher Prices Due to China’s Thirst for Gold 

According to experts, increased demand will lift prices. The price target of $1,600 by the end of next year was given. The article mentioned that gold is insurance against increasing risks.

Weak hands sold gold earlier this year because of falling prices and strong hands are buying gold, probably for the same reason.

Flawed Reasoning

The above stats are fascinating and the conclusion is logical, but appears to be flawed. Why?

Since the beginning of 2013 gold prices tumbled from 1,700 to 1,179 despite China’s thirst for gold (IAU). If China has been buying gold like there’s no tomorrow, why did prices decline at all?

Since early 2013, the Profit Radar Report has expected prices to bottom around 1,250. Whether this is a true bottom remains to be seen (we bought gold near 1,250 and sold our our position at 1,420).

Despite China’s unquenchable demand for the yellow metal, I believe there are still plenty of risks for gold.

End of original article.

Many forces drive the price of gold and silver (SLV), one of them is seasonality. In fact, a seasonal pattern based on 33 years of history projected lower gold prices starting on October 10.

Gold's seasonal pattern is visually illustrated by one chart, which is available here: Gold Seasonality Project this Sell off - What's Next on the Calendar?

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF

 



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