From the Trading Desk
After failing twice ahead of its 200 day moving average a week ago, gold is now down for a fifth consecutive day in a row. The saga with Greece has allowed the USD to gain back ground against the euro which has weighed on gold this week. The latest news is that a debt deal between Greece and its creditors looks increasingly unlikely ahead of the deadline at the end of the month. If a deal is not made, Greece will fail on its payment of $1.7 billion to the International Monetary Fund. With how this Greek debacle has developed, market participants are obviously ignoring the safe haven properties of gold and are instead focusing on its inverse correlation to the USD.
On the global physical demand front, the physical appetite in India has waned recently due to seasonal weather. Indian monsoons have a negative impact on rural income which represents a large portion of Indian gold purchases. As such, the Mumbai market is now trading at a discount to London. In China, demand remains soft overall but has picked up in the last week which has partially offset the decline in India.
Gold and silver didn’t do much of anything today with the dollar gaining fractionally. I’ll stick with my lower low calls but use today’s thoughts to address the latest and greatest reason that gold bugs use to get investor to buy gold. I’m talking about the Chinese using gold to back their currency.
While it is true that China has become the largest producer of gold, and they have indeed increased their central bank stockpile of gold, to speculate the Chinese are going to back their currency with gold is just absurd.
The Chinese are a world leading exporter, producing things not just for consumers in the U.S., but South America, Europe and Africa where they have strong relationships. Why would the Chinese make their goods more expensive than they already are? Here in the U.S., the company that everyone loves to hate, Walmart, had the Walton’s make their billions by buying from the Chinese. China loves sending goods over here to be consumed especially now that the dollar has risen in value most everywhere. Why would Walmart want to pay more for goods with a stronger Chinese currency? They would have to then raise prices here in the U.S.
I was recently in China and saw something I haven’t seen in decades; pop top cans. I first experienced it on the Air China flight I took into Beijing, and again at the Beijing airport.
Also on the Air China flight I was scolded by the flight attendant for using airplane mode on my cell phone. At the airport, virtually no one spoke English. Of course you won’t find anyone speaking Mandarin at U.S. airports, but you do find around the world many speaking English, not Mandarin. Does this look or sound like a country that is ready to take over the world with a gold backed currency? Hardly.
If China was to fight a currency war and win, they would best do it by solving their own issues, continue to produce low cost things people around the world want, resolve their shadow banking situation, control debt, and keep their currency cheap. Then all they have to do is wait for the U.S. spenders to implode.
In the words of Sun Tzu; The supreme art of war is to subdue the enemy without fighting.
The Chinese can wait 100 years for this if they have to.
Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534
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