April 08,2009

Gold Speculators Itching to Jump on Any China "Dollar Bust" Policy

By He Zhicheng
Since the outbreak of the global financial crisis, gold has become the sole standard investment instrument to maintain an upward trend, and there are analysts who predict a further steep increase in its price. However, as I predicted earlier, I believe gold prices will drop to lower than $900 per ounce in April, and possibly $750 to $600 per ounce in the not-distant future.
  
 
Due to its present high price and many substitutes, gold’s influence in the economy is weakening constantly. The only reason for its sky-high price is market hype.
 
Why is the market hyping gold? Malicious inflation, steep USD depreciation, the collapse of the global monetary system, conflicts between China and US due to the depreciation of China’s forex reserve, China’s selling of USD and purchases of gold, the only choice for the country at the moment-all can be reasons.
 
The expectation for inflation, especially malicious inflation, hits the highest hype-note. According to the theory, the emergency government bailouts, especially by the US government, will form enormous purchasing power, leading to drastic price hikes and a USD confidence crisis, putting horrific pressure on other currencies, including the euro, pound, and yen. Since the outbreak of the crisis, the US government has promised at least $11 trillion in bailout funds and guaranties, and over $2 trillion has already been spent. Some economists say horrible things will happen if all this money flows into consumption goods, while politicians are hoping the bulk of it will flow into the real economy. But inflation is still a future prospect, and may be a mild. Anyway, that would be preferable to deflation.
 
And governments now most need to deal with deal with deleveraging, high inventory, and trapped investment.
 
In the past few years, global investors have been profitably long on financial markets, but are now opposed to market trends and seriously out of the money. Investors can either close their positions or constantly buy in new goods. Now most investors choose the latter.
 
During the real economic boom last year, many enterprises laid in commodity and energy reserve resources at high prices and suffered heavy losses with the steeply falling prices in last year’s second half. It will take some time to cut high inventories. With continuing energy and resource supply surpluses, prices for these commodities are unlikely to increase, so what is it that is going to push the gold price up steeply?
 
As for trapped investment, global investors have already lost about $50 trillion, equal to the world’s annual GDP. The middle class has been hit particularly hard with the disappearance of life-long savings. Investors have trapped assets in stock markets, foreign exchange markets, even futures markets. Real purchasing power has plunged, along with purchasing expectations. The most serious problem on most people’s minds is not how to expand consumption, but how to save for the rainy day, or the rainy week. It is going to take a long time for stock and financial markets to recover, along with most people’s purchasing power. So where’s money going to come from to buy gold?
 
More important, stricter global supervision over finance will be launched soon. Gold hype as happened before 2008 will not happen in the coming two years. Markets for investment goods including gold will continue to fluctuate.
 
Another reason for gold’s upward trend has lain in USD worries, which are developing into concern for the whole international monetary system, especially the reserve currency system. It seems quite reasonable that when currencies are depreciating, only gold will maintain its value.
 
China’s attitude is also a realistic reason for high gold price. China worries about not only USD, but all western currencies. That is why it is suggesting something as far-fetched as making SDR a global currency. The problem is that China’s trade surplus continues to increase, and China, with US urging, continues to snap up more US national debt, though many Chinese economists warn the government not to buy USD or euro.
 
What, then, is China to do with its huge forex reserve? Gold and SDR, the IMF’s so-called paper gold, seem to be among its few choices. International speculators would love to see it. Recently, investors long-positioned in gold have been crazily propagandizing drastic USD depreciation and China’s mistrust of USD on the market. Jim Rogers, an American investor and commentator, predicted last week a 90% depreciation of USD. He may also have a bridge to sell you.
 
China’s central bank is quite wise. By merely raising the suggestion of making SDR a global currency, it only wanted to alert the US government to be responsible.
 
Meanwhile, investing in gold, which has dropped from a high of over US$1000/ounce to under US$900, may be a way of making a million, if you start with many more millions.

 

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