Gold and Silver Rise on GM Bankruptcy Fears


"Common sense would suggest [the Chinese] are and have been accumulating gold and will continue to do so."

Gold and silver rose yesterday as stocks came under pressure with increasing fears regarding General Motors' possible bankruptcy. Ostensibly positive news from the financials (Wells Fargo and Goldman Sachs) has lifted markets in recent days but there are concerns that the positive results may have had more to do with government largesse (with tax payers' money) and innovative accounting than any meaningful return to profitability. The rest of the reporting season is unlikely to be so positive as companies and sectors not bailed out by government are set to struggle, which will likely see stocks under pressure again.

Gold's strength was impressive as oil prices fell by a large 6% on demand destruction fears (International Energy Agency lowered its forecast for this year's global oil demand).

Gold's surge to nearly $900/oz was likely due to the U.S. dollar index falling sharply yesterday when China revealed that it has been slowing its purchases of U.S. assets. Reversing its role as the world's fastest-growing buyer of United States Treasuries and other foreign bonds, the Chinese government actually sold bonds heavily in January and February before resuming purchases in March, according to data released during the weekend by China's central bank.

The Chinese government, policy makers and central bankers are on record regarding their intentions to diversify into gold and informed speculation would suggest they are gradually doing so. Slowing their purchases of U.S. bonds and gradually dipping their toes into the gold market.

The Chinese are long-term thinkers and will be extremely discreet in this regard (they will not broadcast to the world "we have sold X dollars of Treasuries and bought X dollars worth of gold") and they will be prudent and make sure that they do not cause a possible run on Treasuries and the dollar. Common sense would suggest they are and have been accumulating gold and will continue to do so.

It would be financially and economically illiterate if the world's largest creditor nation was not diversifying some of its huge accumulated savings into gold in these "interesting times."

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