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
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
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
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
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
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
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.