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When we have gold, we are afraid, when we have nothing, we are in danger – English Proverb

There are probably as many conspiracy theories about gold as there are about Elvis, Marilyn and Moon Landings, but this time the gold bugs can be proven right. Given that the price of gold broke through the magic $1000 mark last week, there is no reason to assume that the price will continue to rise given the level of support from the rest of the financial market. The list is long and wide, encompassing a weak US dollar, central bank purchases and seemingly insatiable demand from China which, when combined with a strong technical picture, suggests that spot gold prices are likely to remain in the $1000 per ounce price point. before climbing higher.

For traders and investors who are not familiar with the gold chart or chart reading, I suggest you pay close attention to the state and fate of the US dollar and China. One of the reasons given for this current episode of dollar weakness has been a return to equities as investors rediscover their appetite for risk, but this is not enough to explain the recent deterioration in sentiment towards the dollar. Furthermore, if the Fed continues to stress that US interest rates are not going to rise quickly, this will also keep the dollar under pressure for some time.

Then, of course, there is China, whose economic relationship with the US can best be described as a marriage in which one spouse is a saver and the other is a spendthrift. With China sitting on roughly $2 trillion of foreign exchange reserves, half of which are denominated in US dollars, even a modest weakening of the dollar will take a heavy hit to China’s wealth. China has responded by not only indulging in a massive spending spree on commodities, but has also made a number of moves over the past 6 months to try to hedge against the devaluation of the US dollar. First, at a recent BRIC summit in Russia, Chinese leaders came out strongly in favor of a new reserve currency to replace the dollar. Second, China has been buying both gold bullion and mining assets in Latin America, even though it is the world’s largest producer at 270 tons per year.

Finally, in the most extraordinary twist, the Chinese government is actively encouraging its citizens to buy precious metals, such as gold and silver, which until 2002 were prohibited. All banks in China sell gold and silver bars in 4 different sizes and Chinese mining companies are also encouraging their employees to convert part of their wages into gold on payday. Gold is traded somewhat 24 hours a day and there are now persistent rumors that the export of silver has been banned, which, if true, could mean gold would be next too. There are also rumors that China is seeking to ban the export of rare-earth metals that are essential in making hybrid and superconducting cars.

Finally, Alan Greenspan’s comments that the recent “surge in precious metal and other commodity prices is an indication of a very early stage of an effort to move away from paper money” would be enough to sustain the current rally in gold prices for some time. to come.

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