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China & PBOC’s gold announcement and consequences

In April 2020, came under new management, articles published before this time, such as the below, may not reflect the views or opinions of the current team.

The severe recent price drop has a few reasons behind it. They go from the financial (and now obvious) matter to the psychological aspects of the market. It becomes a true race between gold and the United States Dollar. In the not-so-distant future, we will see similar kinds of investment options fighting each other. They will be going up and down and this lucrative fight will last forever, and that’s because the investors’ mindset and interests will be always divided.

At least for me, gold investments are always better that the currency ones, no matter which currency is on the table. But why? It’s simple: currencies can be greatly affected by Central Banks policies and decisions made by a group of economist that, in most cases, have hidden agendas. Despite this, most investors don’t think the same way as me and we can see that in the gold’s constant fall these days.

The Federal Reserve (the US Central Bank) is planning to raise the interest rates. If you sum that to the generous growing of the country economy, you will have a serious amount of interested investors. A few months back, the FED had in mind to devaluate the Dollar in order to boost the exports, but after knowing the good results published in recent economic reports about the productive sector and the housing one, they forgot the entire devaluation idea.

Also, we know for sure that gold doesn’t create a flow of income produced by interests or dividends. In that aspect, it has a much lower chance of a return in comparison with currencies, especially with the US Dollar. There is a collateral damage for the gold industry and it resides in the currency subject. The commodities markets all around the world are quoted in US Dollars, so those foreign investors of gold must buy Dollars in order to get access to the precious metal. That simple transaction implies support to the currency, which became more demanded as a natural effect.

In the meantime, the stronger Dollar became more expensive to investors outside the US or, in effect, holders of other currencies, that makes the commodities more expensive too, and that includes the gold. So the precious metal become less and less attractive for investing strategies. Looks like the several difficulties that gold investors are facing right now are a plot against this type of asset. Previously considered as a “safe haven” for many, the gold can represent a threat to Central Banks who wants to delete the gold from the world financial panorama.

Australia, as one of the main exporters of gold, is suffering at every flank. The S&P/ASX All Ordinaries Gold Index drop 8 percent, losing hundreds of thousands of millions of US Dollars in value. The Australian gold miners are suffering severe losses in the stock market because the bearish precious metal prices and the public’s disappointment.

Mr. David Lennox, a commodities analyst at Fat Prophets in Sydney, said that “the Australian Dollar gold price is falling a lot faster that the Australian Dollar and that’s what is hurting the gold miners (…) It’s typically the other way around.” In the few next months, some members in the industry could be announcing important merges, sell-off or even bankruptcies. In fact, an important number of big companies are already selling mines in order to pay debts and cut costs.

The biggest losers were Newcrest Mining, with a fall of more than 8 percent to A$ 12.09, Evolution Mining with more than 14% percent drop to A$ 0.97, Northern Star Resources, one of the companies buying mines lately, with a 9 percent drop to A$ 2.08. Also Gold Road Resources suffered a 9 percent loss too, reaching the A$ 0.36 mark.

Gold fanboys were expecting great news coming from the China’s reserve announcements made by the PBOC. The hype were too high and everybody was incredible wrong. The forecast was over-optimistic. If the announcement would have pleased the expectations, the gold prices would have enjoyed a sudden hike on demand. Instead of that scenario, all the disappointed investors sold their gold.

But analysts think that the gold demand will rise anytime soon from China. Mr. Joni Teves, an analyst at UBS Group AG in London, stated that the Chinese strategy is about keep buying. Right now, China is buying an average of 100 tons per year, since 2009 published data. “China hasn’t been very open about its strategy, so what matters now is whether the market believes they intend to continue buying (…) they do appear to leave the door open to further purchases, which should limit the downside for gold” he said.

The whole “apparent” motivation is a strategy of diversification of their reserves. China does not trust in the US Dollar or its volatile behavior. PBOC do not like to be FED-dependent. Despite this, Goldman Sachs think that China’s demand would not be capable of giving a relevant boost to the gold prices. They aim for the US$ 1050 per ounce mark for the end of the year.

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