Four Keys to Gold’s Next Move

Gold may have moved too high too soon . . . but whether or not the metal manages to recoup and hold onto recent gains near or above the $1000 an ounce level in the days immediately ahead . . . we are nevertheless looking for new highs (above $1032) in the closing months of the year with gold possibly at $1200 or $1300 before the New Year.

Key One: India

I’ve just returned from India, one of the most crucial markets for gold with a long history and big appetite for the yellow metal. What happens next for gold may depend most on the strength — or weakness — of Indian buying. And, Indian buying is both price sensitive and in sync with various holidays, festivals, and the wedding seasons.

With current rupee-denominated prices near historic highs, many are waiting either for a correction or evidence of staying power before returning to the market for new purchases. And while festival and wedding-related buying is expected later this month, the two-week period up to September 19th is considered inauspicious for gold purchases and many potential buyers will wait until later in the month.

If gold can remain near $1000 for the next week or two, giving Indians a sense of confidence that the price is not about to retreat, we can imagine stronger buying interest sufficient to get the price moving toward its previous historic peak and beyond into uncharted territory.

Key Two: China

Official — but unreported — buying on behalf of the central bank and possibly the country’s sovereign wealth fund, the China Investment Corporation, is being joined by growing private-sector demand for both investment bars and jewelry.

Press reports suggest that the Chinese government has adopted a new — more positive — attitude toward private-sector buying of both gold and silver. With China now the number one gold-mining country, it is in their interest to see a higher gold price as long as demand can be satisfied by domestic mine production and scrap reflows. Additionally, it has been suggested that the new pro-gold policy is intended to channel speculative funds away from real estate and equity investments.

The recently announced agreement for the People’s Bank of China to purchase from the International Monetary Fund about $50 billion in SDR-denominated, IMF-issued interest-bearing securities has also contributed to the latest round of dollar selling . . . and, to the extent that dollar weakness is a plus for gold, this has also supported the early September gold rally.

Key Three: Barrick

Barrick Gold’s (ABX) smart move to buy back its gold hedge position provided a temporary booster shot that helped propel the yellow metal through the $1000 an ounce barrier.

If I remember correctly, as of midyear, Barrick — the world’s largest gold-mine producer — had about 168 tons of gold outstanding on its hedge book . . . and would have to buy back this quantity to regain full exposure to future gold-price moves.

Anticipating an announcement effect, Barrick most likely accelerated its gold repurchase program in the days leading up to the September 7th announcement and probably paused to let the market recover from the news and prices to back off a bit before it resumes its repurchase program. With another tranche still to be repurchased in the months ahead, I expect Barrick to buy into price weakness, helping to underpin the price at moments of weakness.

Key Four: Monetary Factors

Of course, clients and readers of NicholsOnGold know that we think U.S. monetary policy and money supply growth are the primary determinants of U.S. price inflation, U.S. dollar performance, and the future price of gold. Last weekend’s communique from the G20 Finance Ministers and Central Bank Governors was a reminder that monetary stimulus is likely to stay for some time. This — along with last week’s report from the United Nations critical of the U.S. dollar’s role as a global reserve asset — has pushed the dollar lower in foreign-exchange markets to the benefit of gold.

If you haven’t already read the full text of my speech to the 6th Annual India International Gold Convention in Goa, India last week, I suggest you take a look for more about gold’s supply/demand situation, important changes in central bank gold policies, and implications of U.S. monetary policy.

Comments

[Ray Winter:]

Many investors on the European side of the pond have it on good authority that China is a most aggrieved party in being sold sub-prime investments as 'prime' by certain U.S. companies. With the value of those investments having dropped to around two cents on the Dollar, they are extremely annoyed and one of the reasons they are unwinding their Dollar holdings by using them to purchase significant tonnages of Gold and other valuable minerals in the market. It is has been reported that they now own some 1,054 Tonnes of the metal.

It is also clear from recent statements they have made that they want an alternative international currency and are actively soliciting joint actions from other Asian countries to create one. Once they are off-loaded their Dollar Instruments to an acceptable level they are sure to make their move to short the dollar so that the U.S. experiences a drop of 98% in the currency.

Now could be a very good time to get into real Gold, but not ETF's and all those bonus's Goldman's staff say they earned will be almost valueless.

Sep 11 12:59 PM

[Mad Hedge F...:]

ziin Those transfixed by gold blasting through the $1,000 level have been missing the real action in silver. The white metal has soared 57% to $17 since the beginning of the year compared to only a 22% move for the barbaric relic, an outperformance of almost three to one. I have been a raging bull on silver all year, and on May 7, grabbed you by the lapels and shook you senseless if you didn’t buy (click here for earlier report ). It is nothing less than owning gold with a turbocharger. Silver gives you a nice double play. Its qualities as a precious metal are giving it a major boost from the flight from the dollar, one of this year’s certainties. It is also an industrial commodity, which unlike gold, is consumed, and therefore gives you a call on the recovering economy. If you don’t think this move is real, check out the shares of the silver producers. Coeur D Alene Mines (CDE) has rocketed by 57% this month, while Silver Wheaton (SLW), and Hecla Mining (HL) have also done well. If you want to get set up on buying silver futures, e-mail me at madhedgefundtrader@yah... and I’ll tell you how to do it. To accumulate .999 fine silver dollars for only a buck over spot, or bullion at the lowest spreads in the market, visit mileniummetals.net by clicking here. How long will it take to get to the old high of $50? The Hunt brothers must be grinding their teeth.

Sep 11 09:07 PM

[Keer-eh Khar:]

Key 5: Hyperinflation as a result of TARP coming soon to an outlet near you

Sep 12 12:10 AM

[petersl:]

Both silver and gold are valid ways to invest in what is going to happen to the dollar. The DXY broke support at 77.5 and is now in the 76 range, and probably heading lower. The chances of a geopolitical event of negative import, is growing more likely as the international community struggles to deal with Iran and its enabler, Putin's Russia. China is the 800 pound gorilla in the room as far as diversification out of dollar denominated assets are concerned, India is still the most significant gold market at present, but rapidly being overtaken by the inheritors of the Middle Kingdom. The only thing that could reverse the trend would be a massive reversal of the "quantitative easing" that the Keynesians are indulging in at present in Washington D.C., ably assisted by various Goldman Sachs alumni in New York and elsewhere. Rearranging the deck chairs on the Titanic is an old homily that comes to mind. Judicious and strategic purchases of good gold and silver mining companies, accompanied with hedging strategies (selling covered calls for instance on rallies) appears to me to be a prudent investment technique.

Sep 12 09:05 AM

[Francis Sch...:]

Technically, we're breaking the huge neckline of this huge reversed Head and Shoulders pattern. Ideally, we now need to run for another week or so and next the neckline 'must' be tested. Once this has been done, we're more or less sure Gold will reach $ 1,260. However, because the price of Gold was artificially kept down for too long, we expect to see much higher levels.

Sep 12 11:01 AM

[HA65MPH:]

Jeff , i think your Keys are not in order , ...China should rank #1...well written , always i say , NO ETF`S !!..HOLD THE REAL IN ''FLOWER POTS ..LOL..OR WHATEVER , BUT KEEP IT CLOSE !..

Sep 12 11:12 AM

[MGA_1:]

Certainly interesting times for the yellow metal. Has there been a campaign to artificially suppress the price? Are the central banks out of gold? It's possible that the yellow metal will go down with the stock market in the future, but one thing I'm pretty certain of - there are more claims against the metal than actual supply. We may see some very interesting and unexpected activity with both Comex & GLD soon.

Sep 12 11:52 AM

[Gigem77:]

Gold as a trade has had a good run and the COT data shows a near term top. But from a macro view gold is insurance. www.youtube.com/watch?...

Sep 12 01:06 PM

[Donald Ingram:]

To say China is annoyed is to put it mildly. There is information from different sources around the web that certain western financial institutions sold China some OTC derivative long contracts to "insure" against loss when oil was making it's 'fixed' run to the high side last Summer, and more of the same long "insurance" to cover the upward swing of silver last year.
Well, we all know what happened to both the price of oil and silver after these long OTC toxic contracts were in place. Can you say a slightly "massaged" market to back the Chinese into a corner and then start to fleece them? How about a little 'blowback' in return! Some very nervous people now holding worthless OTC contracts since the Chinese have announced that some of the OTC contracts will be reneged on, and unilaterally declared null and void!
Gotta like it! What goes around eventually comes around!
Meanwhile the price of both gold and silver are heading sky high!

Sep 12 01:38 PM

[Boxed Merlot:]

…Official — but unreported — buying on behalf of the central bank and possibly the country’s sovereign wealth fund, the China Investment Corporation, is being joined by growing private-sector demand for both investment bars and jewelry.
Press reports suggest that the Chinese government has adopted a new — more positive — attitude toward private-sector buying of both gold and silver. With China now the number one gold-mining country, it is in their interest to see a higher gold price as long as demand can be satisfied by domestic mine production and scrap reflows…

Interesting: Official — but unreported — buying. For over 30 years that I know of, mom and pop gold production in the form of private operators in CA gold mines have had a steady market of buyers for their efforts in S.F Chinatown. I continue to be amused at all the talk of AU not being money when people dig this stuff up and sell it like radishes at a farmer’s market. I suspect there’s far more unofficial and unreported than most anyone can imagine.

Sep 12 01:40 PM

[DEFAULT PAC:]

PURSUANT TO INTERNATIONAL LAW, THE CITIZENS OF THE UNITED STATES HAVE THE RIGHT TO DEFAULT ON US GOVERNMENT DEBT UPON THE ELECTION OF A NEW GOVERNMENT WHICH OCCURS EVERY TWO YEARS. THE REASON IS THAT THE DEBT WAS ISSUED FOR REASONS OTHER THEN TO BENEFIT THE POPULATION AS A WHOLE. I WOULD PREDICT THAT THE US GOVERNMENT WILL VOTE TO DEFAULT ON ITS DEBT. SINCE THE US HAS THE BEST MILITARY ON EARTH, WHO CAN ARGUE WITH THE PASSAGE OF SUCH A BILL. SELL AND SHORT SELL US DEBT USSUES WHILE YOU CAN. THANK YOU. JOHN ROBERT, ESQUIRE

Sep 12 04:05 PM

[5142152-337:]

SUPERB article!

At least SOME posters here are sane! Those who are missing a couple links (you know who you are), please try harder.

Sep 12 05:19 PM

[Northstar10000:]

Gold will pull back very very soon. Dollar rally coming

Sep 12 05:28 PM

[untrusting ...:]

Good article, good information. Thanks. Also appreciated your India speech link and information. Nice concise summary and factual information.

Sep 12 11:24 PM

[learnmoney:]

India has for most of this year failed to buy gold as it was on the expensive side. If they change their minds then YES gold will head higher and draw in new investors.
In the UK the financial press is drawing everyone's attention to the merits of buying gold - EFT, mutual funds or physical. It is very easy for us to go in and buy gold coins and then put them in a drawer. So please look to a few European buyers.

I have one large ETF positions in GDX and a portfolio of gold mining shares - only the large ones and all these have been held by me for 3 years.

However, I do top slice every time gold goes up by $25 per oz. It was the way I was taught 40 years ago by dealers on the London Stock Exchange and it has never failed me yet.

Roll on the price up to $1025.

Sep 13 06:13 AM

[PompanoFrog:]

hey guys..wake up..i recently put together a spreadsheet on gold, money supply growth, etc..i don't see any historical correlation..you need to quote some statistics to back up your assertions..very misleading to novice investors..

hint..recent dollar weakness of 20% over the last 3 years probably related to the strength of the australian dollar..australia is sucking in huge amounts of investment dollars that would be going into U.S..

Sep 14 12:36 PM