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Six-week high for gold at $1,260 an ounce as Shanghai Gold Exchange delivers a record 2,197 tonnes in 2013

 -- Published: Monday, 20 January 2014 | Print  | Disqus 

By Peter Cooper

Gold prices hit a six-week high this week at $1,260 an ounce as data confirmed that Chinese demand was making up for the slack in investment demand from the West.

Some claim China has been fixing the gold futures market to snap up the physical metal at low prices. Gold exports are banned from China so it will never leave the country again.

The Shanghai Gold Exchange, China’s largest bullion bourse, delivered 2,197 tonnes to customers in 2013, compared with 1,139 tonnes in 2012. China topped India as the world’s top buyer last year as demand probably reached a record, according to the World Gold Council.

West to East transfer

However investors in gold exchange traded products lost $72 billion last year as ETPs fell 33 per cent in value, data compiled by Bloomberg shows. That loss in value is almost exactly equivalent to the cost of the gold bought by the Chinese. It’s been a straight transfer of bullion from West to East.

Nonetheless analysts from Goldman Sachs and Morgan Stanley do not think this demand will be sufficient to prevent prices dropping closer to $1,000 an ounce before a rebound. Gold futures have plunged 35 per cent from a record $1,923 in September 2011.

That said on a risk versus reward analysis the downside for gold is limited while the upside potential is clearly a retesting of this high. Gold traders say it would not have cost China very much to trick the market into its big sell-off in relation to the reward it has gained in terms of buying 2,197 tonnes of gold at lower prices. Still this will never be proven.

Why gold?

Why does the Chinese state want all that gold? Some think it is preparing for its own financial armageddon that will see a collapse of its existing currency and its replacement with a gold-backed renimbi. Domestic inflation is already raging out of control and debts levels are huge.

It would be relatively easy to buy up the gold now held by private investors to create a huge gold reserve. If China wants to replace the US dollar, or at least complement it with a reserve currency of its own, then this might be the only way to do it.

What will that mean for the price of gold? This is the sort of scenario that ‘Currency Wars’ author Jim Rickards envisages sending gold to $7,000-9,000 an ounce (click here). It is happening right in front of us and yet the gold price hardly reacts. Suspicious? We could not possibly comment.

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 -- Published: Monday, 20 January 2014 | E-Mail  | Print  | Source:

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