Gold was lower in early New York trading Wednesday as disappointing news out of Europe heightened expectations of further ECB easing, pushing the euro lower. Subsequently, some positive economic data out of the U.S. offered further support to the dollar, which weighed on the yellow metal.
Dismal GDP
The first estimate of 2013 full-year GDP in Germany was a rather dismal +0.4%, suggesting the primary economic engine of the eurozone continues to struggle. This pushed the euro back toward the low end of the recent range, bolstering the dollar in the process. The dollar garnered further support as the yield on the 10-year note popped back above 2.90% on a better than expected January Empire State index print of 12.5 and a rebound in PPI to 1.2% y/y in December, from 0.7% y/y in November.
Despite the firmer dollar and yields, the yellow metal is displaying some resilience at these levels, amid an improved technical picture and ongoing physical demand. Gold set a 5-week high yesterday at 1255.32.
China's Holdings
Much has been made of Chinese demand for physical gold in recent years and gold imports through Hong Kong were closely tracked in 2013. There is some speculation that the Chinese will announce official gold holdings again this year. You may recall that they shocked the market five-years ago in 2009 when they announced they had accumulated 1054 metric tonnes of gold, well above everyone’s estimates.
Kenneth Hoffman, Bloomberg Industries global head of metals and mining research, suggested in a recent study available on the Sharps Pixley website that China’s current holdings are “likely closer to 2710 mt.”
A deeper look into China’s gold holdings shows its reserves may be more than 2 1/2 times higher than thought. Its last reported holdings in April 2009 were 1,054 metric tons. After adjusting for net imports from Hong Kong and domestic output, the figure is closer to 5,086 metric tons. When taking away gold uses for jewelry, industrial and other categories and adding implied bar demand to central bank holdings, the figure is likely closer to 2,710 mt.
Hoffman believes that China is in full-on accumulation mode because they believe the dollar will ultimately be supplanted as the global reserve currency, replaced by “some form of a gold-backed currency.” This may well take some time, but China seems to believe that as the global monetary system is reshaped, those countries with substantial gold holdings will have the most say in what that new regime might look like.
This all dove-tails nicely with the views of Matterhorn Asset Management’s Egon von Greyerz, seen in a video posted earlier today on our blog. “Every single currency has fallen between 97 and 99 percent against gold in the last 100-years,” says von Greyerz. He goes on to state that, “every major country is destroying the value of its money.”
The Yuan
China of course is no exception. They have aggressively depressed the value of yuan in order to make consumer good manufactured there cheap and appealing to the rest of the world. The Middle Kingdom became the world’s largest exporter in 2009 and surpassed Japan in 2010 to become the second largest economy in the world. Just recently, China surged passed the U.S. to become the world’s largest trading nation, reporting total trade for 2013 in excess of $4 trillion.
The meteoric rise of China on the global stage has been nothing short of amazing. I imagine their status will rise even further if it is confirmed that they managed to more than double their gold holdings in the last five years. To boot, they got much of it for a song as the price fell in 2013.
For that, I think the Chinese can thank the misplaced belief among western investors that the ongoing debasement of their currencies has returned us to some semblance of economic stability: Hey the stock market is going up, so all must be good and right with the world.
Western Depletion
If — or perhaps more aptly when — those same western investors are once again in dire need of a safe-haven, perhaps when China makes its move to dethrone king-dollar, I can assure you that all those tonnes shipped off to China are not coming back. At that point, there will be a mad scramble for the severely depleted supply of gold.
Though not attributed directly to China, Mr. von Greyerz expects we will see rises in the gold price “that are hard to imagine today.” He goes on to add that the “prices we’re seeing right now will probably not ever be seen again in history.”