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China and the Fed Combine to Send Gold to New Highs - David Brady (21/06/2019)

China and the Fed Combine to Send Gold to New Highs - David Brady (21/06/2019)
By David Brady, CFA 3 months ago 10272 Views No comments

June 21, 2019

One month before Gold bottomed in August, I stated the following on July 5, 2018:

“Long-term—which starts when the Fed signals it is pausing its interest rate hikes and balance sheet reduction policies and reverting back towards QE and ZIRP, perhaps later this year—Gold is going to new highs, in my humble opinion.”

The timing may have been a little early, but it was a long-term view and now it’s playing out.

https://www.sprottmoney.com/Blog/has-gold-finally-bottomed-david-brady-05-072018.html

I have been saying consistently in Sprott Money articles since then that my primary scenario for the bottom in Gold and the “meteoric rally” to new highs that followed would be an actual reversal in Fed policy to rate cuts, and ultimately QE, which would sink the dollar and cause Gold to soar. Well, the Fed more or less confirmed that reversal in policy at the FOMC this week.

On August 2, 2018, I said that there were three possible catalysts for higher Gold prices in dollar terms:

I said that the Trade War was unlikely to end any time soon, because it was less about trade but a dispute between the reigning superpower in the world (the United States) and the rising superpower (the challenger, China). It was and is highly unlikely that a substantive trade deal will ever be struck, because China will never agree to U.S. demands and the U.S. will never back down unless one or both of their economies collapses.

I have already mentioned the Fed reversal of policy and the weaker dollar, but with respect to the first catalyst, the XAU/CNY has been soaring since then. This is as important to the future direction of Gold as is the Fed reversal in policy. Why?

I also stated in that same article on August 2:

“China has a vested interest in higher Gold prices long-term and an end to the dollar as the global reserve currency. So if you can endure the pain of potentially lower prices in the short-term, I expect Gold to go multiples higher long-term, Silver even more so.”

Then in another article on August 24:

“In my opinion, China controlling the Gold price is the best thing that could ever have happened to Gold in the long-term. Unlike the Bullion Banks on the COMEX, China has a vested interest in a higher Gold price long-term—once they are done buying it on the cheap in dollar terms, that is. They want an end to the dollar as the global reserve currency. What do you think will happen to Gold in dollar terms when that occurs? This is the reason that China has been loading up on Gold for years. Russia too. To hedge against a crash in the dollar.

Follow the smart money long-term.”

China just began publicly announcing its Gold purchases again at the start of the year. Most of us know that China’s Gold holdings are far in excess of its official numbers and that it has been producing and buying Gold for over a decade now. So why the announcements? I believe it was a signal to the U.S. and the rest of the world that they have reached their targeted Gold holdings and no longer need to buy Gold on the cheap. Put differently, Gold could be allowed to rise in yuan and dollar terms.

And rise it has. The XAU/CNY is now approaching 10,000 yuan, a near 25% rise from just below 8100 in August, the exact same day Gold bottomed in dollar terms too.

Meanwhile, the USD/CNY has been relatively stable in a range between ~6.67-6.97 since then. So a soaring XAU/CNY directly translates into a soaring Gold price in dollar terms.

XAU/USD = XAU/CNY divided by USD/CNY

The big question now given that China may have reached its targeted Gold position of 10-12k tonnes or more to be the biggest holder of Gold in the world: Is China driving Gold higher to return it to the center of the global monetary system and therefore diminish the dollar’s role, devaluing it in the process, with the ultimate goal of ending the dollar as the global reserve currency?

Honestly, we don’t know for sure, but it certainly would explain Gold’s rise so far and would mean far higher prices going forward. As I’ve been saying for months now, Gold in yuan and dollar terms have been fused at the hip since August. Should XAU/CNY continue north of 10k, Gold will continue to soar in dollar terms, even more so if USD/CNY falls at the same time.

Another point to consider here is that traditional indicators such as technicals, sentiment, and positioning were rendered redundant by the connection between USD/CNY and Gold from April to August last year:

https://www.sprottmoney.com/Blog/gold-cny-devaluation-and-crash.html

The same may be occurring now, but in the opposite direction, this time driven by XAU/CNY. If so, overbought and extreme bullish signals coupled with a massive short position on the part of the Bullion Banks may not mean anything until XAU/CNY peaks.

Looking forward, we are within a hair’s breadth of the 1400s. The next big resistance on my radar is 1485, 50% of the entire drop from 1923 to 1045. Should we break there, then we can start looking forward to the potential of record highs above 2000. Should we fail, though, there is the risk of a significant drop. It’s no coincidence that 1485 appears synonymous with the 10,000 yuan threshold in Gold terms. But let’s cross that bridge if and when we come to it. Baby steps.

As for Silver, I stated back on May 30:

Silver has bottomed and begun its rally, Gold and the Miners are not far behind.

https://www.sprottmoney.com/Blog/silver-has-bottomed-and-begun-its-rally-gold-and-the-miners-are-not-far-behind.html

Well, Gold may have led to this point, but I expect Silver to catch up and pass Gold by soon. Resistance on the upside is between 16.20-16.50. Through there and the 20s are in the crosshairs next.

Miners are a high beta play on the metals, and to the extent that Gold and Silver rise (or fall), expect miners to continue to outperform.

Congratulations to all of you who have enjoyed this ride so far. Your tremendous patience is finally being rewarded. For those that have not, don’t worry. Nothing goes up in a straight line forever. There will be pullbacks along the way, providing opportunities to BTFD.

Interested in Gold? Check out our DEALS page. Have some questions about precious metals or Sprott Money services?


David Brady has managed money for over 25 years for major international banks and corporate multinationals both in Europe and the US, with experience in Bonds, Equities, Foreign Exchange, and Commodities

In 2016, he created GlobalProTraders.com, an interactive online community for traders to share their views on financial markets.


The views and opinions expressed in this material are those of the author as of the publication date, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.You may copy, link to or quote from the above for your use only, provided that proper attribution to the source and author is given and you do not modify the content. Click Here to read our Article Syndication Policy.

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