Tuesday, March 9, 2010

The Chinese shunning of gold?

Not according to Dan Norcini:

Gold put in an impressive performance today from where I sit battling back from a barrage of selling linked to the ridiculous story circulating around the market today that China was not interested in buying gold. That initially emboldened the raiders at the Comex and sent the lemmings packing and heading for the hills before saner minds prevailed who began buying into the weakness. The result was a strong bounce from important technical support near the $1,110 level (see the chart for a view and read the comments there).

Let’s state the obvious here – the Chinese NEVER announce their intentions beforehand. Do the investors/traders in this nation believe that they are stupid? Anyone who follows the soybean market can attest to this. As we mentioned last time a story appeared announcing China’s intention to buy the remainder of the IMF gold sale; such a thing would be very uncharacteristic for them. After all, we are not dealing with a Gordon Brown here (the Prime Minister of England who at the time he headed the Treasury there announced beforehand his intention to sell England’s horde of gold thereby guaranteeing that the citizens of his nation would receive the lowest possible price). Rest assured that China has no intention of saying the least thing positive about gold purchases knowing full well that they will create a stampede of buying into the market which would guarantee them the worst possible purchase price.

You might recall that after copper collapsed from over $4.00 all the way down to $1.25 that it was not until it had recovered quite nicely off the bottom that word leaked out that China had been accumulating the red metal for its strategic stockpiles. Did China come in and announce beforehand that they were going to buy gobs of copper? Of course not –it was only after the market began moving higher and kept moving higher and traders were speculating as to what was going on that the truth came out. I remember full well the comments from the analysts at the time who were dumbfounded by the fact that the metal kept moving higher in the face of a collapse in the US housing market and an abrupt shutdown of the US economy. They were all sitting around scratching their heads trying to come up with reasons why the market was going up and not down.

It will be exactly the same for gold. China will buy it and you will not know it UNTIL AFTER THE FACT. The price chart will tell us when the buying is occurring but it will not tell us who is buying. I repeat, the East does not announce their intentions until after the fact. They will accumulate the metal on price weakness whenever Western-based hedge funds are in the process of selling it. If I had to bet on these funds against China, my money would be on the Chinese.

One last comment about this matter – China is still reeling from the fact the India beat them to the market on their gold buys late last year. And do not forget that India is going to be adding more gold to their official reserve holdings at an appropriate price level.

Even if you leave the Chinese out of the gold market – gold has not been making all time record highs in terms of the Euro and the British Pound and 30 year highs in terms of the Swiss Franc because China might or might not buy the metal. It has been doing so because it is functioning as a currency without any obligations attached to it. In other words, China’s actions in the gold market have nothing to do with gold’s string of all time highs in these major currencies. It is fear, uncertainty and a desire for a safe haven that have fueled the metal’s rise. China is just an added bonus which will serve to keep a floor under the metal on price retracements.

It looks to me like it's just another head fake--this time thrown by the Chinese to throw speculators and other sovereign governments off their trail.

Disclosure: long gold mining shares.

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