Gold Moves East

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The gold price kicked off this year with a fall.

It dropped from $1422 / oz, down to a low of $1318 / oz by late January.

This was a fall of just 7.3%, but still this gave all the gold bears something to rant about for a few weeks: ‘It’s the end of the gold bull market’, ‘I told you it was in a bubble’, and so on.

We’ve heard it all before, and we can be sure to hear it all again.

But the fall they were all getting so excited about was really just another tiny dip on the way up.

Take a look at the top right hand side of the two-year gold chart below.

That little pull-back was what all the fuss was about…..

Gold price continues its steady march upwards
http://goldprice.org/charts/history/gold_2_year_o_usd.png?0.8974633984098723
Source: Goldprice.com

More to the point, you can see that the gold price has already bounced since then! It is on its way up already, climbing 4% in the last few weeks. It didn’t take long.

Media reports also focused on the amount of gold being withdrawn from the gold ETF (GOLD). This is the world’s largest gold exchange traded fund (ETF), and apparently holds around 40 million ounces of gold for investors.

But when these investors cashed in on a few million ounces of gold last month, the media were citing it as evidence of the coming end of the gold market’s epic run.

But again, take a step back. This few million ounces was but a fraction of the amount of gold on their books. And moreover, this drop is no worse than ones we have seen in the last few years.

Recent withdrawals from the GOLD ETF barely even register in the big picture
etf_withdrawls.png
Source: Credit Suisse

Most reporters would have you believe that the GOLD ETF is the only part of the gold market that you need to look at.

But it is just a small part of the puzzle.

CHINA is soon to be the world’s largest gold market.

With four gold recommendations in Diggers and Drillers (which are up 85% on average), it is what’s been happening in China’s gold market that makes me sleep well at night.

This has always been the main reason I am bullish on gold: the potential demand from the hundreds of millions of newly wealthy, Chinese middle classes.

Not to mention the fact that the Chinese government are doing all they can to promote gold ownership. With a long cultural history of personal gold ownership, this is not a hard sell.

Gold demand in China has now gone ballistic.

It imported 6.7 million ounces in just the first ten months of last year! Compare that to 1.4 million ounces in the full twelve months of 2009.

It’s not just gold either.

Last year China imported 120 million ounces of silver. The year before that it was just 30 million ounces of silver. A 300% increase!

It’s good to know this as another two of the Diggers and Drillers tips are silver plays. These are up 42% on average, with the most recent one just getting going now. (You can get my latest research, and take a test drive of my service by clicking here )

Last week I managed to get my hands on some current data for Shanghai gold trading volumes. This is a market that has pretty much started from scratch just a few years ago, but is already now going at full tilt.

It’s hungrily vacuuming up any gold that US investors are silly enough to liberate.

Shanghai Gold Exchange volumes climbing last six years
China_gold.png
Source: ANZ commodity research

There are many days where 30million ounces have changed hands, and the 12 month rolling average is now closing in on 20 million ounces daily. This is one busy market.

So with this kind of growing demand from China, it really is hard to see the gold price falling very far, for very long, in the foreseeable future!

The fact is that for all the media coverage of gold, only a fraction of global investment assets are tied up in gold and gold stocks. It’s just a fraction-of-a-fraction of the investible universe.

The thin bar on the bottom right of the chart below is what we are talking about.

Gold is still a small fish in a big pond, for now anyway…
gold_as_percent.png
Source: Barrick

Maybe this is the real reason why so few commentators understand the gold market. Because so few are genuinely involved with it!

There are many willing to venture an opinion, but few who really know the gold market. Check out Sprott Asset Management’s commentary to hear it from some of the best.

The good news is that until gold becomes main-stream, there is still a huge opportunity there. When the media start saying gold is good, that’s when I’ll be thinking about selling out!

For the foreseeable future though, in the words of another one of the world’s best gold commentators Marc Faber

‘The risk is really not to own any precious metals at all’.

Regards,

Dr.Alex Cowie
for Money Morning Australia

Dr. Alex Cowie
Dr. Alex Cowie is the editor of Diggers and Drillers, Australia's premier resource stock tip sheet.
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Comments

  1. I think unallocated gold and etfs are the same thing. True? Please explain…..anyone.

    Reply
  2. Mostly correct. Assuming you are Australian, and by ‘unallocated’ you are talking about Perth Mint, then you are in ‘reasonable’ hands, in that the gold probably really does exist. Perth Mint is in effect a gold clearinghouse for metalpaper exchange they are in the business of finding buyers for metal dug up by the miners, so without moving on the metal they have no real business. Perths unallocated appears to be legit, however as I read it, ‘unallocated’ is like cans of beans on the shelf in a supermarket. You can assume there will always be beans there, probably even 99.9% of the time. That 0.1% is probably when you need the beans though, as thats when everyone else is buying (converting to allocated\ buying).

    An ETF however, is designed to capture(park) fiat to generate management fees for the owner of the ETF. The ETF owner has to acquire and if they try to peg against spot they also have to actively manage and rebalance. ‘Audits’ are carried out to make sure they even have that metal, because, lets face it… it’s a hell of a lot more profitable if they have no metal (storage fees, purchase fees, finding metal in volume, managing the metal for new share releases.).

    In both, legally you probably have nothing except the right to get your money back. So, logically, if the price of gold goes completely nuts one day, and moves to $5000 ozt, and you decide that ‘It’s time to get my metal back because inflation is going nuts and I want to make sure they don’t sell my gold to someone else, like the swiss did’… how do you even know you’ll get back anything except inflation degraded fiat.

    I’ve written much on ‘ownership’ to many people, including here. In short, you only own it if you can defend it. (Not just gold, but anything.). IF you cannot defend your ‘claim’ to a gold bar in the Perth Mint unallocated pool, then you cannot claim to own it. You know what you need to do.

    If you are going to buy, prefer Wednesdays US time. In fact Thursday morning about 1-2am, Sydney time is usually ideal. Saturday morning around 6-8am is often good too. Clearly you need a dealer with a web login to buy during NY Open or during the Globex access market. Watch, price of gold tomorrow will be less, possibly the best dip this week if the selling doesn’t reverse this weeks uptrend ;)

    This all has to do with typical placement of selling activity. Once the Commitment of Trading report window is closed for the week, the sellers
    push harder. IF they want to push for a quick down trend with minimum volume they resume, late friday afternoon NYC time.

    Best of luck.

    Reply
  3. Thanks Chris, much appreciated, I know what I need to do.

    Reply

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