The price of physical gold hit a three-month high in London this morning on news that the Chinese were not going to hike interest rates.
Most traders were expecting the Chinese to hike rates to stave off inflation, which is now at a 28-month high of 5.1%. In an effort to hedge against this inflation, Chinese retail investors are turning to gold.
In Friday’s Wealth Daily, Luke Burgess wrote:
China’s gold imports to jump 457% this year. The Shanghai Gold Exchange recently revealed China’s gold imports jumped almost fivefold in the first 10 months of this year.
And even though China is the world’s #1 producer, the country is expected to import 9.2 million ounces of gold this year as inflation concerns lifts investment demand.
Albert Cheng, managing director of the World Gold Council’s Far East department, said at a recent conference in Shanghai that China’s gold investment demand may reach 150 tons this year — a 42.9% increase compared to 2009.
New renminbi gold contract
Demand is so high in China that the Hong Kong bullion exchange will launch the first international gold contract denominated in renminbi in the spring of 2011.
According to The Financial Times, “The new contract comes as China pushes for greater international use of the currency and as Hong Kong’s precious metals industry seeks to take advantage of booming gold demand on the mainland.”
The exchange expects trading volume will see a 20% increase when the renminbi gold bars hit the market.
Currency flees China
In light of Chinese inflation fears, the renminbi is flowing out of the mainland and into Hong Kong. Deposits jumped 45% in October from September to US$32.5 billion — helped along by currency restrictions, which were lifted in July.
Demand is expected to increase so much that the Hong Kong government set up a high-security gold vault for overseas investors to store their gold.
The tale of three charts
The combination of currency wars and inflation in China means that both gold and oil are on the verge of breaking out.
The U.S. Dollar Index is at a crossroads…
As you can see, the Dollar Index against a basket of currencies is in a long-term downward trend and below its 200-day moving average. At the same time, there is support at 76.
I expect it will trade in this range for the rest of 2011 as the fight between global flight to safety and the bond vigilantes work themselves out.
Oil pushing a breakout
We have a new range for crude as it is bouncing between $87 and $91 a barrel. As the global economy gets back on track, we should see oil breakout above $91.
The Wall Street Journal‘s survey of economists raised their projection for GDP growth to 2.6% for 2011, up from 2.4%.
Both FedEx and UPS are gearing up for their busiest day ever today; UPS expects to ship 16 million packages up 13% from last year. Shipping companies are leading indicators.
I want me gold
The price of gold continues to stair-step higher.
There are a number of things that could drop the price of gold:
- A massive new discovery on the scale of Spain’s discovery of South American gold mine could swamp demand;
- Or governments could tie gold to currencies and confiscate gold;
- Or perhaps a surging growth sector — like the dot-coms — could siphon conservative investors away from gold.
The most likely scenario is a gold mania followed by a blow-off top and disillusionment as transpired in 1970s. We are not there yet.
All the best,
Christian DeHaemer
Editor, Wealth Daily
