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What’s China up to with gold?

 -- Published: Sunday, 19 July 2015 | Print  | Disqus 

By Peter Cooper

So the Chinese restate their gold reserves after six years of pretending that nothing has changed and everybody is surprised how little they now claim to have bought. None other than Bloomberg thought they might have three times that amount of gold judging by the publicly available evidence of buying.

No doubt Bloomberg is right and the Chinese gold is sitting in some other national account, perhaps a sovereign wealth fund or some such. So why did they decide to reveal so little right now?

Chinese logic

Well when you are the world’s biggest buyer of a commodity you want to keep the price down. Then again when you also want to up your gold reserves for the IMF’s SDR program in October, and to bolster confidence after a stock market crash, then you have to do something.

Hence the rather unexciting revelations last week. But we would not be surprised to see China continuing to add 100 tons a month to its total until it gets up to something closer to the true figure. For it makes sense to revalue these gold reserves now that they have been bought, and both the new total and the new price is likely to be very high.

The gold price is likely bottoming out at the moment. It is not at the top is it? Adam Hamilton has recently analyzed the shorting position in gold and silver and finds record levels of shorting (click here).

Now on the one hand we know from historical evidence that the shorts usually get this wrong. On the other we know that when shorts are forced to cover it always has a dramatic impact on the price.

In the case of gold, the $1,450 an ounce forecast from LBMA’s top predictor, Ross Norman could easily be realized in this move. Extreme shorting is a leverage on the gold price in either direction and when it gets it wrong then things really take off.

1929 déjà vu?

Back to the China crisis, and remember a 1929-style crash of a major stock market is not a common occurrence. Yes there is bound to be some gold liquidation but where will the retail investors in China stick their money now?

Gold was their traditional choice and only abandoned as the stock market boomed and 90 million brokerage account holders went bananas. They will now come back home and boost the gold price.

Besides what will the Chinese government do now? It is slashing interest rates and loosening credit like it last did in 2009, and that was how the gold price rocketed from under $800 to $1,923 in 2011.

Did somebody say it might be different this time? You know it never works that way!

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 -- Published: Sunday, 19 July 2015 | E-Mail  | Print  | Source:

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