Gold Firm, Despite Volatile Start To The Week

Gold began the week by posting a new three-week high at 1248.40, but then ‘flash-crashed’ all the way back to 1214.89 due to large sell orders in gold futures, that caused a ten-second halt to COMEX trading this morning. The Wall Street Journal reported that “more than 11,000 gold futures contracts were traded in one minute at 10:14 a.m. EST, or about one-tenth of gold’s recent daily trading volume.”
 
Perhaps more interesting this morning is how readily gold snapped back to recapture most of those intraday losses. The yellow metal is currently back above $1240.
 
While gold remains at the lower end of its range, the nearly 5% rally from the most recent challenge of the 1179.83 low from June has offered encouragement to those that believe incredibly strong physical demand and tightening supply warrant a higher price. James Steel of HSBC told Ambrose Evans-Pritchard that “physical buyers may view $1,200 as an attractive entry point.”
 
Clearly that has been the case, as our phones here at USAGOLD light up anytime we get close to that level. Andrew Su of Compass Global Markets noted in a CNBC interview yesterday that there have been three failed attempts to break below $1180, which defines the “average production cost of gold around the world.”
 
Much has been made of the great exodus from various gold ETPs in the past year, but that outflow has been readily absorbed by physical buyers in the East. China is thought to have imported a record 2,000 metric tonnes of gold in 2013. Much of that likely came from the London vaults of ETP custodians.
 
Investors in the west are selling paper and strong hands in the East are snapping up the physical hand over fist. “The wild card is China, still buying fistfuls of physical gold,” says Evans-Pritchard.
 
I don’t see it as “wild card” at all. China will continue to accumulate physical gold and their policy is well conceived. They have been buying gold aggressively on an official level for some time now, largely thought to be driven by reserve diversification. However, there are many who believe that China is preparing for some sort of global monetary reset, which is likely to include gold in some manner.
 
Dr. Zu He Liang, Director of the Chinese Gold Market Research Center, believes “gold represents mankind’s yearning and aspiration for stability, and healthy economic development.” If there is indeed to be a global reset at some point, China wants a seat at that table, and a prominent and influential seat at that. The Chinese logically believe that the more gold they have, the more influence they will have.
 
Investors in the West — as well as governments — should be keenly aware that the physical gold flowing East is not coming back. That will leave a reduced supply of available physical when investors and governments once again realize the importance of gold as an asset class. That anticipated tightness of supply and the inevitable return of high demand in the West is a recipe for higher prices.