It seems illogical that gold price movement seems to be dominated by US internal factors while most gold trade is elsewhere.
LONDON – What’s driving the gold price? At the moment it seems to be a succession of knee-jerk reactions to U.S financial data which push the gold price up or down, depending on the perception as to whether the data will likely bring the US Fed’s proposed interest rate rise programme forward or move it backwards. It really isn’t a logical situation – but where’s the logic in the precious metals markets anyway? To many, gold is a relatively underutilized metal which works well as jewelry, but nowadays has little else going for it apart from a long history of monetary usage which nowadays may have had its time. Bankers and economists discount its usefulness as such.
But much of the world still sees gold as the ultimate money and wealth protector and curiously, given the amount of bad press and supposed economic downgrading suggested by much of the financial establishment, the world’s top economic institutions – namely the world’s central banks – are still loath to part with it. The central banks of the US, Germany, France, Italy, Portugal, the Netherlands – even Greece, Venezuela and Cyprus– hold over 50% of their foreign exchange reserves in gold according to IMF official statistical data. Indeed the US holds some 73.7% of its reserves in gold. Meanwhile some central banks which now see themselves deficient in the amount of gold they hold – of which perhaps the most significant is Russia – are buying gold to add to their reserves. Not bad for a metal apparently with no monetary purpose nowadays.
While we note that some central banks are buying, perhaps the biggest buyer of all is China. But it’s not saying. Its official gold reserve is only 1,054 tonnes and has not been added to (or it has not reported any additions to the IMF) for six years, although it is widely believed to be buying gold in quantity and ‘hiding’ it in government accounts it is not reporting to the IMF. Indeed estimates of the amount of gold China really holds vary from the 1,054 tonnes as officially reported through to a massive 30,000 tonnes plus as suggested by Alasdair Macleod, the Head of Research for Gold Money. Macleod’s figure is generally dismissed by other gold analysts and a consensus figure of perhaps 3,500 tonnes for the Chinese holdings seems to be emerging, but as Macleod pointed out in a recent interview, China could report its gold reserve at whatever level it likes, or feels would suit it in the political great game.
Be this as it May, the fact remains though that today the price of gold is set in the US but the vast majority of physical metal is being bought by people in Asia – mostly China and India, the world’s two largest consumers which between them are accounting for most of the world’s newly mined gold on their own. It thus seems strange that the price is being set elsewhere. The Chinese in particular seem happy to go with the flow – it keeps the potential cost of accumulating additional reserves relatively low, if indeed it is so doing. But at the same time there does seem to be an element of price control creeping in. Economists in the West have been almost unanimous in talking the gold price down – perhaps to levels of around $1,000 or less. But every time the gold price falls much below $1180 it seems to falter and recovers back towards the $1,200 level again. This seems to be proving to be a very strong resistance range on the downside. Could it be that the Chinese in particular are loath to let the price fall given that the nation as a whole (i.e. the government) has indirectly pushed its citizens into buying precious metals through advertising the benefits in state-controlled media. Mineweb published an article on this back in 2009 and its still worth reading –China pushes silver and gold investment to the masses as some of the points made in the article have indeed come about since, and it was then we first surmised that China might be looking to move a significant proportion of its foreign reserves into gold. 2009 was the year gold surged upwards through the $1,000 level for the first time and also the year when China last reported an increase in its official gold reserve to the level it is at today.
We also suggested then that the nation was unlikely to ‘pull the rug out from under millions of investors’ hence the suggestion above that it may well be that it is China which is supporting the gold price at current levels every time it looks like falling back much below the $1,180 level.
China is also making a number of moves which in themselves would look to be gold price supportive in the longer term. The latest is the Chinese Silk Road initiative and a related $16 billion Silk Road gold fund – the latter being announced earlier this year. This also ties in with the China-led Asian Infrastructure Investment Bank (AIIB) which will rival the World Bank and the IMF, while Alasdair Macleod comments that the Chinese will likely also set up a rival to the IMF’s Special Drawing Right (SDR) currency basket – and go ahead with this if it is excluded again from its currency becoming a part of the existing SDR when this is due to be reconsidered in October. Macleod reckons this would include an element of gold in its make-up. There are thus a number of initiatives currently under way, largely led by a China-Russia axis, to move the center of gravity of the global trading system away from its current US domination – and the more the U.S. tries to counter the rise in Chinese influence to protect this the more likely China and its allies (notably Russia) are to develop new alternatives as we are already seeing – and gold may well play a part, although to what extent is still uncertain.
But gold is certainly part of the Chinese agenda. The fact that US interest rates might rise by a quarter of a basis point is of absolutely no significance at all to those who are actually buying gold in China and India and this is likely yet another area where there has to be a medium to long term move to wrest this pricing control away from the US and London. This is already in process with the likelihood of a Shanghai ‘Gold Fix’ possibly coming in to play later this year to rival London and with the rise of precious metals commodities and futures exchanges in Shanghai, Hong Kong and Singapore. The days of gold price dominance by the US markets look to be on their way out. It may take a little time yet but the portents are that financial domination is gradually moving east with little the traditional market makers can do about it, although exactly what this might do to metals prices is also uncertain.
Original article written by Lawrence Williams.