Why China Is a Key Reason to Be Investing in Gold
Recently, a major event was held that sent a signal to anyone interested in investing in gold.
For the first time ever, the London Bullion Metal Association (LBMA) held its annual meeting in Hong Kong. It is a trade group that represents the wholesale market for gold and silver and it's telling that it decided to have its meeting in Hong Kong.
However, the site choice should not come as a surprise to anyone following the gold market. China has become more and more important to the gold market. The Asian giant's imports of the shiny yellow metal have become a key factor in gold's positive price performance over the last few years.
Investing in Gold: China's RoleBullion demand from China has soared in the past several years.
In 2007, China accounted for just 10% of global gold demand. By 2011, China was responsible for 21% of global gold demand. This trend can easily be seen in figures from the World Gold Council (WGC). It said gold demand in China has risen from about 250 tons in 2006 to almost 800 tons presently.
What the WGC numbers don't tell you about though is how China's central bank, the People's Bank of China, is buying gold. Gold imports into China via Hong Kong (the route the central bank uses) has continued to rise rapidly despite a dip recently in gold buying by Chinese consumers.
Hong Kong has seen on average about 65 tons in gross imports of gold per month. Year-to-date China has imported an astounding 582 tons of gold, more than the official holdings of another country well known for loving gold, India.
It is not shocking that the Chinese central bank is trying to get its hands on large amounts of the precious metal.
As David Gornall, chairman of the LBMA, told the conference "The country [China] has only 2 percent of its reserves in the form of gold." He added "that allocation can only go in one direction."
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How the Fiscal Cliff Will Affect Gold Prices Now
On news of a second term for U.S. President Barack Obama, investors didn't show any excitement as the market fell 2.3% the day after Election 2012.
The fiscal cliff countdown has come to the forefront of concerns this week, helping push the Dow Jones Industrial Average down more than 2% since last Friday.
But for gold prices, this could be a good thing.
Here's how the fiscal cliff will affect gold prices as Washington battles over how to solve the looming threat to the U.S. economy.
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What an Obama Win Means for Gold Prices in 2013
With a U.S. President Barack Obama win in Election 2012, look for gold prices to soar above $2,000 an ounce in 2013.
Prior to the election's results, gold players had been on the sidelines but they jumped back in and took the precious metal back above $1,700 per ounce on Tuesday.
On Wednesday, gold rose to near two-week highs of $1,730 before falling to a steady level of $1,714.50 per ounce for December futures.
"Since Obama was elected in 2008, gold is up 116% and silver us up a whopping 198%," said Money Morning Global Resources... Read More...
By The 2016 Election Gold Could Be $3700 an Ounce
It's now two years and two billion dollars later...
And in many ways, we're right back where we started with the same President, and a house divided.
For investors, all the uncertainty this situation brings to the fiscal cliff and its impending tax increases and spending cuts are likely to fuel plenty of volatility for the next several months.
Yesterday's almost 300 point drop on the Dow and a 7% pop in the VIX are good examples of this.
We can also expect Ben Bernanke to be in place until at least early 2014. The only change I expect from the Fed now is more frequent and still larger easing campaigns, as well as potentially extending low rates, again, beyond mid-2015. Even if Bernanke is replaced, I expect only more of the same seriously misguided policies.
In fact, just yesterday San Francisco Fed President John Williams hinted that the most recent QE3 bond buying program could well exceed $600 billion.
So what does all of this mean to investors in hard assets--particularly those with holdings in gold and silver?
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What to Expect From Gold Prices If Obama Wins Election 2012
Now that Nov. 6 is here, it is tempting to look at what might happen to gold prices if the incumbent - U.S. President Barack Obama - wins Election 2012.
Leading into Election Day, traders are the most bullish they have been in 10 weeks. Eighteen of 27 gold analysts contacted by Bloomberg News were expecting higher gold prices in the short-term, while only five of the analysts were bearish.
Holdings in gold exchange-traded funds (ETFs) reached a record 2,588.4 metric tons on Nov. 1, which was valued at $140 billion. According to Bloomberg data, holdings in gold ETFs in the past three months have enjoyed their best run since August 2011.
Of course, the rise in bullishness regarding gold is not only due to the presidential election, but also to continued loose monetary policy from the U.S. Federal Reserve. Gold did rise 70% as the Fed bought $2.3 trillion of debt during the first two rounds of quantitative easing.
So should gold investors expect anything to change if President Obama wins re-election?
The Secret Return to the "Gold Standard"
Although it happened more than 40 years ago, many Americans still rue the day back in 1971 when U.S. President Richard M. Nixon effectively took this country off the so-called "gold standard."
Under a true gold standard, paper notes are "convertible" into pre-determined, fixed quantities of the "yellow metal."
What actually happened back in 1971 was that President Nixon - facing huge budget and trade deficits, and a plunging dollar - enacted a series of economic moves, including the unilateral cancellation of the direct convertibility of the U.S. dollar into gold.
By slamming the "gold window" shut, Nixon also brought down the curtain on the existing Bretton Woods system of global financial exchange.
The fallout was immediate, creating a situation that financial historians still refer to as the "Nixon Shock."
Proponents of the gold standard say the real damage is still being wrought: That decision four decades ago led directly to the uncertainty, volatility and irresponsibility that we see in the U.S. economy and global financial markets today.
Whether you agree or not is a topic for another time.
But what I'm here to tell you today is that the world's central banks have quietly - almost secretly - returned the world to a new version of the gold standard.
Back in 2010, the world's central banks became net buyers of gold for the first time since 1988. Buying ramped last year and net purchases exceeded 455 metric tons (tonnes). That was the largest net purchase since 1964.
But the world's central bankers will handily eclipse the 2011 totals here in 2012: They will purchase a projected 493 metric tons this year as they expand reserves to diversify away from the U.S. dollar and protect their countries' economies against inflation, Thomson Reuters GFMS said.
And GFMS said you can expect central banks "to remain a significant gold buyer for some time to come."
Real Asset Returns Editor Peter Krauth told me he completely agrees with that assessment.
As Peter explained: "You can see their thinking, Bill ... you can see them saying: "We have enough of all these fiat currencies in our bank reserves - now we want something that's going to counter those holdings, that's a valuable asset and that has all the right fundamentals in place.' And that asset is gold."
We're seeing the results of this "new gold standard" in the marketplace...
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What to Expect from Gold Prices If Romney Wins Election 2012
With the presidential election less than one week away, market watchers are estimating what kind of impact a Mitt Romney win would have on the markets, including gold prices.
Gold is expected to continue its rise in 2013, reaching up to the $2,000 mark - or higher.
On Oct. 23, Deutsche Bank analysts called for gold to exceed $2,200 an ounce next year. This came in light of the stimulus measures by central banks.
They wrote in a research note via Commodity Online, "While we have targeted gold prices moving above $2,000/oz. since the beginning of 2011, we believe the Fed's open-ended program of QE announced last month increases our confidence that a surge in the gold price above this level is only a matter of time."
Yesterday (Wednesday), December gold futures closed at $1,719.10.
But if we fast-forward to January, even March 2013, if Romney wins Election 2012, would gold prices be able to continue their upward run?
Here's what a Romney win would do for the yellow metal.
India's Demand for Gold to Boost Prices Before Festival Season
With the U.S. markets taking a break thanks to Hurricane Sandy along with the upcoming U.S. presidential election, it's been a quiet gold marketplace.
On Wednesday, markets returned to action and December gold prices rose to a week high on the Comex of $1,720.40.
But even without activity in the States, gold prices have a major catalyst from another part of the world: India.
This year, India's demand for gold has been off as authorities blame the metal for the country's economic problems, higher gold import fees and a lower Indian rupee.
But Indians don't stay away from gold for long - especially ahead of festival season.
Festival season in India, which includes Diwali and Dhanteras, starts in November. Weddings will also take place during this period with gold jewelry included in dowries.
With a "pent-up' demand for gold in India, it has the potential next year to hit new highs -- past $2,000 an ounce, reported Emirates 24/7.
On Tuesday, trading in the December gold contract on the Multi Commodity Exchange (MCX) closed 0.01% higher to 31,097 rupees per 10 grams, after seeing a 30,968 rupee low--a level not seen since August, reported Reuters.
Gold Prices in 2013: Where We'll Be in Six Months
Gold investors have enjoyed a bull market for more than 10 years.
In fact, the metal's string of annual gains is its longest winning streak in at least nine decades.
So it is hardly surprising that some investors are questioning whether the strong performance will continue for gold prices in 2013. Recent market activity shows a short-term pullback is on its way.
As Money Morning's Chief Investment Strategist Keith Fitz-Gerald explained today, "Many hedge funds and institutions are using gold to collateralize their marginable assets right now so one of the first things they're going to sell to raise cash when faced with a margin call is gold. They're also sitting on large profits that they'll immediately begin to take off the table in a sell-off. This will end up catching a lot of investors by surprise because they expect gold to take off when the stuff hits the fan."
But that doesn't mean the long-term 2013 gold price outlook is doomed.
Fitz-Gerald said gold will take off - "but only after it takes an initial hit."
In fact, Money Morning Global Resources Specialist Peter Krauth said gold could hit $2,200 by April or May.
Looking beyond the sell-off, here are three key drivers of gold prices in 2013.
How to Play Q4 Defense: Hedge Your Bets, Up Your Stops and Sell Your Gold
So far fourth quarter earnings have made a mockery of things.
Of the 20 S&P 500 companies that have provided Q4 guidance so far, 18 of them have guided lower, "slashing" their forecasts, according to Goldman Sachs and CNBC (as of Monday afternoon).
What's more, roughly one quarter of the reported earnings have come in flat to middling. According to Capital IQ, overall revenues are up only slightly at 0.34%.
Yet, for some reason the S&P 500 is only 3.89% off of its highs and is up 12.01% year-to-date through Wednesday afternoon.
Under the circumstances this suggests two things to me:
- There's a lot of volatility waiting in the wings; and,
- The near-term risk is to the downside.
The Q4 Earnings Story
So far this earnings season, roughly one quarter of the S&P 500 has already reported. That leaves the market with nearly 375 companies that have yet to spit out their numbers, roughly 150 alone this week.
Assuming the balance follows the pattern set so far, companies like Caterpillar Inc. (NYSE: CAT), Philip Morris International (NYSE: PM), and 3M Co. (NYSE: MMM) are going to show "respectable" (under the circumstances) numbers while talking about the "challenges" they see ahead.
Meanwhile, a few others, like DuPont (NYSE: DD) and United Technologies (NYSE: UTX), are going to reflect weakening earnings and revenue pressures leading to further cost-cutting as a means of protecting profits. These will include job cuts.
I also expect the bulk of the remaining companies will take the opportunity to lower their expectations -- especially when you consider that 61% of the companies as of Monday afternoon missed revenue expectations.
The irony here is that 61% of the companies that have reported over the same period have also exceeded analysts' expectations.
Naturally the markets will punish those who missed even when what they should recognize is that the analysts were wrong yet again. But that's another story for another time.
What's important to understand is that top-tier company management is using this earnings season to accomplish three things.
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Dip in Gold Prices Nothing to Fear; Long-Term Outlook Bullish
A drop in gold prices earlier this week made some investors nervous, but the long-term factors pushing the yellow metal higher haven't changed.
Following a 5% increase and a rise in exchange-traded funds holdings in the third quarter, gold prices fell back to earth Monday, falling 1%.
It was gold's greatest one-day fall since July.
Most of the news that hurt gold prices was fleeting.
Positive U.S. retail sales data raised concerns the Fed would abbreviate its purchases of mortgage-backed securities. Investors were also worried early in the week about the possibility of weak Chinese economic data, although that didn't materialize - China posted growth of 7.4% on Thursday, as expected.
Finally, as Mitt Romney rises in the polls there's concern that as president he would implement bigger cuts to U.S. government spending, which would be bad for gold prices.