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China to Adopt Partial Gold Standard
By Patrick A. Heller

As I predicted in early August, this week the spot price of gold broke over $1,000. As I write this, it remains to be seen whether the price will stay above that level or will take a few attempts before climbing above $1,000 to stay.

Actually, my prediction was that gold would reach $1,000 sometime between the last week in August and the end of September. Gold prices rose significantly last week to threaten $1,000, but there was no way that the U.S. government would let gold close at or above that level for a three-day holiday weekend.

Those who have read my previous columns have a good idea why I expected gold to reach $1,000 and why I think it has a good chance to rise maybe even as high as $1,200 by the end of September.

So where are we likely to head in the immediate future? Customers are constantly asking, because they want to know if there is a prospect of buying gold at a lower price in the near future. Here's my expert answer - I don't know.

For the past couple of decades, gold normally tested a new high about three times before it held there. If it could not overcome two sell-offs, then the gold price would not breach that level.

It is entirely possible that there could be multiple tests of the $1,000 level before holding, which means that there could be opportunities to purchase gold at a somewhat lower price. It is slightly possible that prices may retreat $25-$40 to build a broader base before testing $1,000 again.

In years past, that is what I would have expected.

The bearish outlook is supported by GFMS CEO Paul Walker. GFMS is one of the most prestigious precious metals consultancies. It prepares analyses of gold supply and demand for the World Gold Council, for instance. In an interview with Mineweb released Sept. 7, Walker stated that he thinks it unlikely that gold will experience a sustained rally above $1,000. While he thinks gold prospects look favorable for the long term (10 to 15 years), he thinks the recent jump in prices represents "a little more downside risk in the short term."

Further in the interview, Walker explained that the current rise was caused by "lumpy transactions" which are different than continuing elements of supply and demand.

This time it could really be different for the price of gold.

GFMS has already been caught significantly under reporting gold demand at least since 2003 when it did not detect that the Chinese central bank had been purchasing large quantities of gold reserves. GFMS recently claimed that current Chinese demand is not enough to affect gold's price.

GFMS needs to look at reality and correct its misinformation. For instance, on Sept. 7, Ambrose Evans-Pritchard reported in the London Telegraph his conversations over the weekend with Cheng Siwei, the former vice chairman of the Chinese Communist Party Standing Committee. Cheng now serves as a sort of Chinese economic ambassador for the world.

Cheng stated on the record that China has lost confidence in the U.S. dollar and is going to shift to a partial gold standard through reserve accumulation. He said, "Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the market."

In plain English this is a statement that China is buying gold on any price dips and will continue to do so. In the past few months this is exactly the pattern of gold market trading. Each time it looked like gold might be on the brink of a large decline, a major buyer has stepped in to halt the drop. It is likely that this buyer was the Chinese government.

China has now gone on record as being a continuous major buyer of physical gold. Over the next several years, the price of gold is almost certain to reach far higher levels than today.

In the immediate term, it is entirely possible that gold may experience a brief fall before the price goes back up. With the revelation of China's intention to buy lots of gold, however, it could happen that the price of gold will quickly move above $1,000, never to go back below.

Other fresh developments support that possibility. Last week Hong Kong's government announced that it was establishing its own vaults to hold its gold reserves, which would be brought back from London. It is expected that this vault will also store the gold for the Shanghai Futures Exchange. A few months ago, it was disclosed that a major gold vault was being established in the United Arab Emirates to securely store gold that is also currently in London. Up until now, the London Bullion Market Association has been the world's largest gold trading center. The opening of these new vaults and the pending removal of gold from London represents a "run on the bank" of the physical gold used by the U.S. government and its trading partners in their price suppression efforts.

By the way, Walker's negative comments about "lumpy transactions" probably refer to events like the transfer of gold held in London to vaults in other countries.

Almost buried in all these developments was the announcement by the Chinese government that its state-owned companies will have the right to default on some commodity derivatives trades. Ordinarily such a statement that a nation will not legally enforce such commercial contracts would scare away future business. But the Chinese have so much financial clout that commodity producers have to find a way to deal with them, instead.

In the past week, the mainstream financial media has been reporting on the rising price of gold, but generally seem clueless as to why this is happening. I expect the gold market for the rest of September will continue to be exciting, but don't anticipate any enlightenment from the mainstream financial media.


 



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