Earlier this week we reported that China has been on a public relations campaign to encourage its citizens to buy gold and silver (with a slight preference for the later). We'll talk about what that means for gold prices and the rest of the precious metals in a moment. But first, a small digression…one lesson we have learned here at MetalMiner since we launched this blog back in December 2007 is this: China moves world markets. Any slight uptick or downtick in demand in China causes global markets to move. This was certainly not the case when Stuart and I first met back in 1994. We joke about how "the new dynamics" (meaning last 5 years) of China have changed the way we, for example, discuss metal price trends in general as well as specific metals in particular.
But let's return to gold and silver. BMO Capital Markets are calling for gold to reach $1300/oz in 2011 in the case of a bull market and $750/oz in the case of a bear market. It's rare to see both a bull and bear case presented in one piece of analysis. So what are the factors supporting the gold price? Undoubtedly, one of the largest drivers involves ETF investments. According to Standard Bank, ETF gold holdings increased by 372 tons during the first two months of the year though they have slowed in August, growing by 33 tons. We would also suggest that the value of the US dollar remains one of the largest drivers. Inflation concerns also drive the price of gold but in this instance, we feel gold may get a boost due to the new China policies.
According to our own manager on the ground in China, "in 2008, total consumption of gold metal was 400 mt, including 70 mt as investment (gold bullion). In the first half of this year, total consumption of gold is 200 mt, but gold for investment increased by 35%, which means gold for investment increased faster." He calculated that based on this information the gold for investment in the first half of the year could be around 47 mt.
As Stuart covered in his earlier post about China encouraging the purchase of gold and silver others have speculated that the move is designed to help Central Banks diversify away from the dollar. And although China's advertising campaign to its citizens will not support that particular agenda (after all, the Chinese will pay for gold and silver bars with RMBs), any purchases made by China's central banks particularly for imported gold would certainly support that theory.
Moreover, some believe China's drive toward precious metals stems from its losses on commodity related derivatives contracts as reported in this Economist article. China's SASAC (State-owned Assets Supervision and Administration Commission) may allow state controlled enterprises to break derivative contracts established with NY and London banks. (The derivatives were purchased as a hedge against rising commodity prices). Others argue that the dollar is the currency used for counter party risk. If China backs out of these derivative contracts, where will the dollar go?
All of this leads us to the question of price. Our feeling is that gold and silver are poised to increase. And though this entire post mostly covered China and its "new" demand for gold and silver, we can't ignore the impact ETF's have on the price of gold. Yet on the flip side, both scrap and physical metal have found their way into the most recent gold market rally, which could have the effect of tempering the price rise, according to Standard Bank, though the bank suggests that might not be the case this time around.
Therefore, we believe gold may increase to perhaps up to $1100/oz and silver to $20/oz (mind you we are not technical chartists). In as much as ETF's and other speculators invest in these markets, the entire precious metals complex is poised to increase but we don't see any major changes in terms of platinum or palladium demand in particular to support a price rise yet it's clear that the money pouring in alone will likely push metal prices higher.