Julian Phillips looks at what will happen to gold if and when the Chinese yuan becomes part of the SDR basket
The Technical picture for gold has shown a sideways movement from late 2013 until now, 18 months later. As we have pointed out during this time, Asian demand comes in at under $1,200. Although in China gold is priced in the Yuan, it has followed the same pattern there because the Yuan is ‘pegged’ to the dollar. We see this continuing until the Yuan is one of the currencies that makes up the SDR which cannot ‘officially’ happen until the 1st January 2016. At that time we believe that the pricing power over gold will be firmly in the hands of the Chinese.
Until then we expect the New York price to be at the mercy of traders and speculators. One would have thought that the Chinese would have jumped into New York to move the price up. But we have to ask why? Will that increase the amount of gold on offer long term? No. At current levels and in a market where the price seems to be tied in a limited trading area, supplies, overall, are at their best.
But this will sap production where many gold producers are losing money and where production is at maximum because lower prices are forcing higher production so that the mines remain profitable. So what will lift gold prices? It is when low areas of demand [primarily in the developed world] turn upwards because of some event, such as [as Jack Lew of the U.S. Treasury department indicated] a financial accident over Greece or the like. But as supplies are drained from the market at current prices to go eastwards, when developed world demand does come in they will find not only that there is little gold available but as prices rise and hold there the supplies will lessen, making prices go even higher.
You may say, “Won’t Asian demand back off?” Our answer will be to point to the determination of the Chinese to control pricing power and increase supplies to Shanghai [as the Silk Road Gold Fund indicates]. So if they have to move prices up, on condition that the current level of supply comes with it, they will do so.