Are we about to see a Chinese gold rush?

August 20, 2012 at 08:44


Currently, gold is at the top of this $1,550 (£987) to $1,620 an ounce range, but market watchers are split on what will happen next, with the gold price bulls and bears both having plenty of fodder to support their case.

A Bloomberg poll of gold analysts released on Friday showed that they are the most bullish on pricing prospects for six weeks. With gold at the top of its trading range, does this signal a breakout?

Out of 26 analysts surveyed by Bloomberg, 14 expected prices to rise this week, with six expecting a fall and six seeing neutral price action. So, this is far from a resounding bullish cheer.

There was also news last week in an SEC filing that both George Soros and John Paulson had increased their investment in SPDR Gold Trust, the world’s largest publicly traded physical gold exchange traded fund (ETF).

Mr Soros upped his stake in the ETF to 884,400 shares from 319,550 and Mr Paulson bought 4.53m shares, bringing his stake to 21.3m.

At the current price of about $156 a share, these are new investments of about $88m of Mr Soros’ cash and more than $700m from Mr Paulson’s funds. These are significant positions.

However, Mr Soros’s words of wisdom on the gold price have not always been worth following. At Davos in 2010 he declared that “The ultimate asset bubble is gold”. The price was at about $1,100 at that time. Also, Mr Paulson’s gold fund has slumped by almost a quarter this year.

The bears were tossed some scraps in the latest demand trend report from the World Gold Council (WGC), which looked at demand trends in the second quarter of this year.

Total gold demand in the period fell by 7pc to 990 tonnes on a year-on-year basis and 10pc quarter-on-quarter.

For the first half of the year, gold demand of 2,098.8 tonnes was 5pc lower than in the first half of 2011, but 14pc above the five-year average.

“The second quarter of the year was a period of broad sideways consolidation for the international gold price,” the WGC said. “While some investors used this pause in the price to add to their investments, others chose to liquidate and realise profits on their holdings until a stronger price trend emerged,” the gold advocate added.

The net effect of these buyers and sellers on gold funds, however, was almost zero. Outflows from ETFs in the second quarter amounted to just 0.8pc.

The main bull point in the WGC analysis was that demand from central banks had accelerated during the quarter.

The so-called “official sector” saw its gold reserves increase by 157.5 tonnes, the largest quarterly net purchase by the sector since it became a net buyer in the second quarter of 2009.

Last week, there was also some glimmers of hope for investors in gold equities, which have slumped significantly this year.

African Barrick Gold’s shares jumped after its parent – Canada’s Barrick Gold – revealed a bid approach from state-owned China National Gold. This is interesting from the perspective of gold miners, which look likely to see a period of consolidation, but it is also interesting because of China’s relationship with gold.

China has a lot of its reserves in US dollars. As of June this year, data from the US Treasury showed the country held $1.2 trillion of US treasury bills. The country has long been rumoured to be seeking to diversify the reserves held at the People’s Bank of China. Buying gold mines could help with this task.

However, most of the bulls currently have their eggs in the quantitative easing basket, waiting for a new round of money printing to devalue the dollar and boost the gold price. Should QE3 fail to emerge, there could be some big disappointment.

However, owning some gold as a hedge against inflation is a sensible investment strategy. For the first time in a while gold equities are looking interesting. If China’s appetite for gold increases, there could be more acquisitions ahead.