Simon Maierhofer | 2013-09-12

 As mentioned in a prior article, I used my recent visit to Germany to dig for some unique perspectives not commonly dispensed domestically.

Here is one about a new gold rush – and rising gold prices - caused by China.

The Handelsblatt, Germany’s economy and finance newspaper, featured this headline on the August 22 front page: “China Can’t Get Enough Gold” (all the information below is taken from this article).

With 1,054 tons of gold, China (FXI) sports the fifth largest gold reserve among nations. This sounds like a big number, but China’s gold holdings makes up only 1% of its total assets.

It is unknown how much gold China’s central bank is buying, but it’s certain that the Chinese government wants to beef up its gold stake.

Chinese citizens are also drawn to the shiny metal, as the stock market is considered volatile and citizens are not allowed to invest outside the country.

Does China Plan to Topple the US Dollar?

It is speculated that the communist leadership is pushing for a long-term currency reform as it amasses enough gold to return to some form of gold standard.

Even though China is the world’s biggest gold mining (GDX) nation (China mined 370 tons of gold last year), according to the Handelsblatt, 798 tons of gold have been shipped from London to China in the last six months. 

The metal is melted down in Switzerland and then discreetly moved to China.

According to China’s gold council, China is on track to surpass India as the world's biggest gold consumer this year. 

Higher Prices Due to China’s Thirst for Gold 

According to experts, increased demand will lift prices. The price target of $1,600 by the end of next year was given. The article mentioned that gold is insurance against increasing risks.

Weak hands sold gold earlier this year because of falling prices and strong hands are buying gold, probably for the same reason.

Flawed Reasoning

The above stats are fascinating and the conclusion is logical, but appears to be flawed. Why?

Since the beginning of 2013 gold prices tumbled from 1,700 to 1,179 despite China’s thirst for gold (IAU). If China has been buying gold like there’s no tomorrow, why did prices decline at all?

Since early 2013, the Profit Radar Report has expected prices to bottom around 1,250. Gold briefly dipped to 1,179, but whether this is a true bottom remains to be seen. I didn't trust the latest gold rally and recommended in the August 25 Profit Radar Report to sell gold at 1,420 (GLD at 137.20). 

Despite China’s unquenchable demand for the yellow metal, I believe there are still plenty of risks for gold. 

Fortunately, investors don’t have to take any risk right now. Gold – and silver (SLV) – sport pretty clear support/resistance levels that will reveal a break down or break out. The support/resistance levels are discussed in the most recent Profit Radar Report.