Path of the gold price is in China’s hands
This is an updated and almost completely re-written version of an article first published on Mineweb.com immediately following the Swiss Gold Referendum at the beginning of December. The general premise of the earlier article holds good. To read the original on Mineweb click on this link: China holds the gold price key
By: Lawrence Williams
The predictable ‘No’ vote in the Swiss gold referendum did indeed prompt a quick knee-jerk downwards reaction in the gold price, this was exceedingly shortlived, the result having been already assumed by the markets, and an immediate bounceback took the gold price back above the $1200 level and the price has stayed within range of this figure for nearly a month now, although there has been some intra day volatility, perhaps due to short covering coupled with the big money players in the market seeming loath to allow any significant upwards breakout.
We said at the time on Mineweb that we could be in for a volatile few days, although we felt that we were perhaps beginning to see some positive momentum in gold, after its dip down to around $1160 in the referendum aftermath. After its rapid recovery from this level we have been seeing $20-30 price moves up and down, but in general these have seen gold return to a trading range a few dollars above or below the $1200 level.
The question now though could gold fall yet further by the year-end or in early 2015? Views are very mixed on this possibility among the major bank analysts. What should be worrying for the gold bulls is that some of those predicting further falls, back perhaps to the $1000 level, are also analysts for entities with very deep pockets who could perhaps make this happen if they are so inclined to do. And they are not the only ones suggesting there could be a further big fall in price. Will we perhaps get down to WaveTrack International’s predicted $1,100 level (although this also sees a rapid very strong gold price increase following on), or perhaps Goldman Sachs’ $1,050 or lower – an entity with the financial clout to make this happen.
See: Elliott wave analyst sees big gold and silver price surge ahead
There are even those predicting even worse things for gold – my eyes were drawn to a prominent advertisement on kitco.com for a U.S. financial newsletter writer (Harry Dent) suggesting that the gold price could yet fall back to $700 an ounce. (We don’t believe China will allow this to happen though.)
For gold mining companies most can survive (just) at $1200 gold. But company executives will be reconsidering their options if the price should dip further – if indeed they have any. After all well-respected commentators have noted that much of the gold mining industry is already under water at $1,200, although the bigger ones are remedying this through effective cost cutting. Lower oil prices will be helping here too. But in reality costs can only be cut so far – and these may well adversely impact longer term profitability. Even those who have felt that using a gold price of only $1,000 to calculate whether their operations are viable or not at lower gold prices will be looking to re-assess where they stand at $900 gold. Some mostly smaller companies may well give up the battle to stay afloat.
Is there thus any hope out there for the gold investment sector? The pressures driving the gold price downwards have been enormous, although as we have pointed out on Mineweb on a number of occasions, demand already appears to be exceeding supply, probably comfortably – and at $1,100 gold or lower the supply gap is likely to continue to widen as scrap sales dwindle away, the lower price stimulates new purchases in the East and new mine production falls as some miners bow to the inevitable and have to shut down lossmaking operations.
It may not quite be that simple though. Those miners that may have high grade sections may concentrate on these and higher grades through the mill at full throughput means higher gold output. But the scope for this to be implemented becomes more and more difficult as time progresses and this can only be a short-term measure – and also leads to reducing values longer term for those which survive. And of course, the scope for high grading among many of today’s massive tonnage, low grade operations, and some others too, is strictly limited.
Is there any light at the end of the tunnel? Maybe. But is this just clutching at straws? Under the Goldman scenario, the answer is probably no until the bankers feel they have driven prices down sufficiently to buy back into the market and make mega profits on a reversal in the price trend. But this depends on how much of the recent strange activity in the gold futures markets is profit-driven, self-serving, or at the behest of higher anti-gold powers who see a rising gold price as a threat to the global economy. Certainly in the case of the Swiss referendum, the vast and totally unprecedented propaganda levels brought to bear on the population by the Swiss Executive and the Swiss National Bank, suggested that the prospect of a ‘Yes’ vote could just not be allowed to happen.
See: Harsh words on Swiss Gold Referendum from von Greyerz
But if WaveTrack International’s Peter Goodburn is correct in his analysis, a gold price fall back to $1,100 will be rapidly followed by perhaps a two- to three-year recovery taking gold, silver and the other precious metals to new highs, resulting in huge multiples in gains in gold stocks. This is all based on Elliott Wave data, which has been remarkably consistent over the years in matching price patterns for virtually any commodity. Although if this can hold true in the face of the current unprecedented interference in the gold futures markets obviously remains to be seen.
However, even the WaveTrack prediction probably needs something to kick-start the recovery process and we still feel China ultimately holds the key to the gold price. Despite the mainstream media keeping on telling us Chinese gold demand is diving, Chinese demand this year, as represented by withdrawals from the SGE, actually remains on track to reach over 2,000 tonnes. It’s already passed 1,900 tonnes and if the recent 50+ tonne/week average level is maintained until the year end should reach comfortably over 2,000 tonnes. Indeed as the Chinese New Year approaches this tends to be a very strong time for Chinese gold purchases.
But should China want to make a specific impact on the gold price it has all the ammunition it needs to do so. There is a very strong belief among many analysts that China is building its gold reserves to at least match, or perhaps exceed those of the US, and if it is so doing and should come clean and announce a major increase in its gold reserves – the last time it did so was nearly six years ago – this would give an immediate massive fillip to the gold price and is a scenario those traders short gold must dread.
Or, even if this is not the case, should China wish to see the gold price rise in order to keep its citizens who have purchased gold happy (they were effectively encouraged to do so by the government-owned banks), or to embarrass the West, it has enormous foreign exchange reserves available to intervene in the market and buy physical gold sufficiently to turn the markets around strongly. We have just seen a rather remarkable drop in reported Chinese foreign exchange reserves despite the country maintaining a strong balance of trade surplus. Could this be yet another sign that China is liquidating dollar holdings and buying, but not reporting, gold?
Gold is actually seen as in short supply anyway in the West, which is why the gold believers cannot understand recent price movements which seem to fly in the face of economic supply/demand logic and a China boost could have a very rapid strong upwards effect. India the other major player has also been reporting a huge surge in gold imports and between Indian and Chinese demand gold is continuing to move from weak hands in the West to much stronger hands in the East.
See: Indian summer for gold and silver. Can it go on?
In the case of China Western governments may be wise not to tweak the tail of the dragon as it certainly has the wherewithal to play the gold card and throw global markets into turmoil, and drive the gold price ever higher.
I agree on China controlling the gold price or Shanghai preventing Comex from selling it down.
China commented at their Gold Conference in September 2014 that the $200/oz fall in the gold price in April 2013 was a one-in-2 million year event, and that it partly happened because Shanghai (SFE) could not then trade 24-hours per day – now it can.
Also that at the price in September 2014 at ~$1200/oz about one-third of China’s mines were insolvent. So no I don’t see $1000.
At the last conference in Tianjin in October 2014, China’s largest gold producer stated that he thought gold would be between $1100 and $1400 in 2015.
Most respected forecasters seem to have gold in the 1225 to 1250 region in 2015, which seems achievable, although the CPM group does have 1350.
The big question has to be whether the IMF makes the RMB/CNY a reserve currency in its 5-yearly (SDR)decision later in 2015 – and that could happen.
I have never allowed myself to get wrapped up in all the conspiracy theories related to gold Lawrence. I have always viewed it in two ways- 1) as a flow of funds (momentum) issue or 2) as a fear factor safe haven issue. Fear drove gold until confidence in equities was re-established hence the loss of interest (flow).
Supply and demand have always been farcical terms when applied to gold simply because of its lack of consumption. Therefore the cost of supply is meaningless in my mind. Equity investors in gold are famous for the amount of abuse they will allow themselves to be subjected to by public gold mining companies. I cannot think of one gold company that treats their shareholders as the owners of the company that should receive an ample return for their investment. They are merely treated as sources of periodic funding instead.
So you will likely be surprised therefore to see me bullish on gold for 2015. The key reasons are the equity and debt markets finally playing themselves out with respect to capital gains and the enormous black swam volatility that is screaming out at the moment. Emerging market volatility, corporate debt volatility, severe liquidity issues and severe liquidity mismatches (no buyers of last resort). So I suspect the gold momentum trade will be back on in earnest in 2015 with a year end forecast of $1420.
Doug (Bob Loblaw) Beattie