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Gold Prices Are Going to Get Wild

The Many Ways China Affects Gold

Written by Briton Ryle
Posted March 19, 2014

Gold traders and investors have been pretty excited lately. Gold’s 13 percent rally since the start of this year has issued three important signals indicating that the 2.5 year correction since September of 2011 may finally be over.

• Firstly, gold closed 2013 with a double bottom at the critical support area between $1,175 and $1,200. This is the same area that figured so prominently as major resistance from late 2009 to early 2010, and as major support in mid-2010. It is also considered the bare minimum all-costs-in extraction price for gold miners. The level simply had to hold, and it did – twice, as indicated in blue on the accompanying chart of the SPDR Gold Trust ETF (NYSE: GLD).

• Secondly, in early February gold broke through a major descending trendline of upside resistance in place since Q4 of 2012, indicated in red below.

• Thirdly, gold’s 50-day fast moving average is about to cross over its 200-day slow moving average, a major bullish event known as a “golden cross”, circled in green below.

If gold’s golden cross fully materializes and holds, prices could mount a rapid ascent to $1,500 before Q2 is out.

The same $1,500 area that formed major support from late 2011 to early 2013 would then become a major area of resistance, noted in yellow below.

Gld chart (small)Click Here to Enlarge

Source: BigCharts.com

While last year’s $1,200 area of support can still be revisited once or twice more later this year, it certainly appears to be quite likely that we are at the end – or extremely near the end – of gold’s correction.

But that doesn’t mean gold is now going to run straight up to its 2011 all-time high – not right away, at least. Gold still needs to go through a period of stabilization before it reaches new peaks, and should remain range-bound from about $1,200 at the low end to $1,400 or even $1,500 at the high end for the rest of this year.

This volatility is to be expected not simply because it’s what usually happens after a major correction, but also because of a few things happening in China. China is about to make gold very volatile.

China To Increase Its Transparency

If China were to ever invite you to a poker game, don’t go. It keeps its cards very close to its chest, and doesn’t give you very many signs to reveal what it’s thinking. China’s secretiveness over its foreign reserves could be setting gold up for a wild swing to the upside - yet another reason why $1,500 might be touched.

It all hinges on how much gold China’s central bank – The People’s Bank of China (PBOC) – has been purchasing to diversify its foreign reserves, most of which are held in U.S. Treasuries. According to the PBOC, the central bank has not been adding to its gold stockpile, with its gold reserves remaining unchanged at 1,054 tons since April 2009.

Well if that were true, then the Anunnaki have been landing on Earth and taking our gold again, because some 500 tons of it are missing.

Poring over the Chinese government’s notoriously sketchy numbers, analysts can’t make its 2013 gold figures add up. Supposedly, China imported 1,158 tons of gold last year, while its mining sector produced 428 tons, for a total of 1,586 tons of new gold supply in 2013.

Subtracting last year’s gold consumption of 1,066 tons leaves some 520 tons of surplus gold somewhere within China’s borders that remains unaccounted for, as the PBOC insists they didn’t store it.

While it has been speculated that jewellers and gold vendors may have stocked up on gold inventories, it must be noted that 520 tons is nearly two-thirds of the 813 tons currently held by GLD, the largest gold ETF in the world.

At $1,360 an ounce, 520 tons equals some $22.66 billion, an awfully large amount to be stored in a few jewellery producers’ inventories.

It is believed that the PBOC will in the near future reveal updated figures on the composition of its reserves, finally announcing how much gold it currently has in its vaults. If it turns out that those 520 tons of gold have indeed been parked in the PBOC’s vaults, it would in one fell swoop move some 20 percent of last year’s global production of gold off of the “available” list and into the “you can’t touch this” list.

When analysts erase the old numbers and write in the new numbers, the realization that there is less gold in the marketplace should send the gold price upward as the available supply adjusts to a lower level.

Remember how gold fell from $1,600 to $1,300 in mid-2013 when just 25 percent of GLD’s gold stores were dumped into the marketplace? The acknowledgement of the removal of twice that amount from the marketplace into China’s vaults could theoretically send gold up twice the amount by which it fell… theoretically… though $1,500 seems a more likely upside barrier.

China To Loosen Its Currency

There is yet another means by which China could soon send the gold price gyrating up and down. This event is even more probable than the releasing of data as noted above – as it involves the releasing of China’s currency, the Yuan, to finally float freely against other currencies.

While the Yuan isn’t floating freely yet, earlier this week the Chinese government took a significant step in that direction by doubling the amount the Yuan would be allowed to move in a single day from 1 percent to 2 percent above and below the government-set midpoint rate.

This wider trading range will increase the currency’s volatility, as all those deviations can quickly add up to some pretty significant moves. The Yuan has already posted a 0.97 percent drop in value versus the USD in just the three days since the trading range was widened this past Monday. Even with the narrower 1 percent range in place earlier this year, the currency has dropped 2.53 percent in just the two months from its recent high on January 14th.

Increased volatility in any currency translates into increased volatility in the price of gold as expressed in that currency. So if the Yuan will be moving up and down more often and by larger swings, you can bet the price of gold in China will be more volatile too. This will result in gold being more actively traded in China, introducing quite a different mindset from the traditional buy-and-hold activity the Chinese are famous for.

Granted, the vast majority of Chinese will likely never sell their gold and will simply just keep buying on the dips as they have been for years. But more and more Chinese are becoming active investors and traders as they gain access to more markets and investment choices. As the Yuan begins moving more freely, the gold price will too, increasing gold trading in China, and making gold’s supply/demand balance more dynamic.

Now that China has officially overtaken India as the world’s largest consumer of bullion based on annual purchases, a more volatile Yuan and more volatile gold prices in China means more volatile gold prices globally.

Go With the Flow

Does this make you nervous? It shouldn’t. If we stick to sound investment allocations and discipline ourselves to periodic rebalancing, fluctuations in gold and other precious metals markets will be something to look forward to, not dread. There is money to be made buying on the dips and selling on the climbs.

The trouble, of course, is that we cannot know ahead of time where the bottoms and tops are, making it quite impossible to buy and sell at the absolute perfect times. But if we stagger our purchases and sales at regular intervals – every few dollars or percentage points – we could lock in profits without needing to predict where the bottoms and tops are. We simply cue up our trades in a row and wait for the gold price to roll right into our traps.

Over time, the mid-range buys and sells cancel themselves out, and all you are left with are a series of buys at the lower prices and a series of sells at the higher prices. You will have bought low and sold high without ever having made a single prediction.

They call it dollar-cost averaging; I call it the only way to trade. If properly funded within a percentage allocation that is comfortable for you, dollar-cost averaging can help you harness the power of volatility instead of being devastated by it.

Joseph Cafariello

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