Six MORE Forces to Push Gold Higher into 2011
Commodities / Gold and Silver 2011 Dec 05, 2010 - 05:11 AM GMTBy: Sean_Brodrick
Gold recently logged a 25% gain so far this year, and many people think it’s time to bank gains and head for the benches. While I’m never opposed to grabbing nice gains, I think there are much NICER gains to come in gold.
I can give you a list of forces I’ve told you about before — lack of new supply, new and surging demand from gold ETFs, the world’s central banks switching from net sellers to net buyers, and more.
But today, I want to tell you about six more forces that will keep the heat on gold at least into the first quarter of 2011 — and probably beyond.
#1) India’s Imports of Gold Are Jumping. This summer, demand for gold in India, the world’s #1 consumer of gold, cooled off as the weather heated up. But that changed recently as the advent of the festival season unleashed India’s pent-up hunger for the yellow metal.
In the third quarter, India’s gold imports surged above last year’s total imports by almost 100 metric tonnes, hitting a new high of 624 tonnes. Many market experts think we’ll see India’s gold imports cross the 750-tonne level by the end of the year. That would be way up from last year’s 595 tonnes. And this is happening despite the 23% rise in gold prices.
India’s gold buying is probably getting a lift from that country’s rip-roaring economy. India’s gross domestic product grew at an 8.9% clip in the third quarter, and it continues to zoom along.
Is this bullish for gold? Heck, yeah!
#2) China Aims to Pass India. China’s consumer demand for gold is growing so fast that if the current trend continues it will pass India to become the world’s #1 consumer of gold by 2014.
Nearly 16% of global gold demand went to Chinese households between July and October this year, rising from the previous three-year total of 14%. Chinese consumers bought almost half as much gold since the global financial crisis began in mid-2007 as all investors living in the West.
One force driving this is a worsening fear of inflation. October consumer inflation in China hit 4.4% compared to a year earlier, faster than expected and the hottest inflation in 25 months. Since gold is a traditional hedge against inflation, Chinese consumers — who have no access to overseas gold markets and funds — are rushing to buy gold coins, bullion and bars.
And this is on top of China’s existing cultural affinity for gold. The Chinese are big savers, and one way they like to store their money is in gold.
The website BullionVault.com recently put together a chart showing how Chinese gold demand is rising with that country’s savings:
Most of China’s gold buying is still in jewelry, but investment demand is picking up fast. And remember, it is only in the last four years that the Chinese government significantly relaxed the rules for buying precious metals for its citizens.
As more people in China become more affluent, they buy more gold. Estimates of the size of China’s middle class vary depending on how you define it. A lowball estimate is 150 million people, but according to Professor Lu Xueyi of the Chinese Academy of Social Sciences, 23% of China’s population (230 million people) belong to the middle class; five years ago it was 18%. No matter what the actual size, everyone agrees that China’s middle class is growing. Lu Xueyi estimates that the number will increase by 1% every year.
And one study estimates that China’s middle class will hit 600 million people by 2015 and 700 million people by 2020 — more than twice the entire population of the United States!
In any case, a lot more Chinese are getting a lot more disposable income, and many of them decide to spend it on gold. And it’s not just China — India is adding about 40 million people to its middle class every year.
And there’s a new way for the Chinese to buy gold …
#3) New China Gold Investment Fund. The growth of China’s middle class is a long-term factor. A more short-term force in the price of gold is that China has approved the country’s first mutual fund that bets on gold prices.
Lion Fund Management said on Monday that it won approval from the China Securities Regulatory Commission to launch the Lion Global Gold Fund, which invests in gold-backed exchange traded funds (ETFs) overseas.
“The fund offers a brand new way to invest in gold, giving investors access to ‘golden opportunities’ globally,” the Beijing-based fund house said in a statement.
Other fund managers in China are racing to roll out gold funds. This could unleash a tidal wave of investor demand, just like funds including the SPDR Gold ETF (GLD) did in the United States.
China’s gold consumption is already expected to rise about 4% year over year to hit 430 metric tonnes this year, according to a senior executive of China National Gold Corp, one of the country’s largest gold producers. We’ll see if the new gold fund juices up next year’s total.
And then there’s China’s ongoing quest to build up its Central Bank’s gold reserves. China’s foreign exchange reserves stood at $2.648 trillion at the end of September. One Chinese leader after another keeps coming out to say China should put more of that money into gold. It’s a pretty good bet they’re following their own advice.
#4) The Days of Easy Money in China Aren’t Over. Remember how, just a couple weeks ago, professional worry-warts lined up to fret that China was going to clamp down on bank lending to try and cool down its red-hot economy? Maybe not! Data from China’s central bank suggests that the country’s domestic banks may end up lending more money this year than the government intended.
After raising interest rates last month and raising reserve requirements for banks shortly afterward, officials then threatened to impose new controls on everything from lending to agriculture prices.
But it turns out that China’s domestic banks extended 6.9 trillion yuan of new loans in the 10 months through October, suggesting that the government’s full-year target of 7.5 trillion yuan may be breached, according to central bank data.
All this is inflationary, which should stoke the fires under gold demand in China even more.
#5) Could the Euro Implode? We spend so much time worrying about the U.S. dollar falling off a cliff — which could happen — that many Americans barely noticed the euro is in serious trouble. Everything is subjective, and the dollar is starting to look downright attractive in the short term against the crisis-addled euro.
The euro recently fell to a two-month low against the dollar after a bailout for Ireland failed to ease concern that a debt crisis will continue to spread throughout Europe’s weaker economies. Even after the $113 billion bailout was announced, the cost of insuring Spain and Portugal’s debt soared to new heights, crushing the euro. And Italy is right behind them on the crisis train to crazy town.
As I wrote on my blog earlier this week, there are four possibilities for the euro …
- The bailouts for Greece and Ireland work, and the panic stops there.
- Greece probably leaves the euro zone and restructures its debt. The deterioration continues on to Portugal and Spain, but a package of EU-IMF support stops the crisis there.
- Three or more sovereign defaults in the next five years — quickly priced into the market (a euro “mini-crash”) and dealt with.
- The euro splits — with some (the “prudent” countries) having one euro and others (the “imprudent” countries) either sharing another form of the euro or starting their own currencies again.
European bankers come up with one short-term fix after another, which leads to short-term rallies in the euro. But the long-term outlook is becoming more grim, and long-term investors — deciding whether to hold a paper currency in trouble or a hard asset like gold that has stood the test of time — are voting with their wallets and buying more gold.
The euro debt crisis probably won’t be resolved one way or another anytime soon. We can expect it to drag on into 2011, and provide ongoing upward pressure on the price of gold — and silver, too.
#6) IMF Sales Aren’t Slowing Down Gold. On Monday, a spokesman for the International Monetary Fund (IMF) said that the IMF sold 628,000 ounces (19.5 metric tonnes) of gold in October as part of its open-market bullion sales plan.
So what happened to the price of gold when the IMF was selling into the market? Did gold go down? Heck, no! Gold gained $50 in October.
And for the year so far, the IMF has sold 4.8 million ounces (148.6 tonnes). Did that weigh on the price of gold? Take a look …
Remember, this is how gold behaves when the IMF sells millions of ounces into the market. What will gold do when the IMF gold sales end? I’d say it could go ballistic.
Heck, there are plenty of other forces — geopolitical troubles in Asia and the Middle East for starters — but I think you get the picture. More and more bullish forces are lining up for gold, ready to start the metal on the next big leg of its rip-roaring bull market.
What You Should Be Doing Now
With all these forces standing in line to push gold higher, you should be using pullbacks to add to your positions. I like physical gold and silver, of course, and I’m happy to use funds like the SPDR Gold Trust (GLD) or iShares Silver Trust (SLV) for a trade. Mining stocks are leveraged to the metal, and so they should outperform going forward, as they have all year.
And that brings me to my silver and gold report, $50 Silver and $2,500 Gold. I hope you bought this report when it first came out. If you did, you know how well your open positions are doing. If you didn’t buy it, here’s the good news — there’s still time. Sure, you missed out on some big gains. But there are even bigger potential gains just waiting for you.
Do not waste another minute! Get this report and start targeting your own treasure trove of riches today!
Yours for trading profits,
Sean
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