Why China Loves Gold


"we still view gold. . .as a no-brainer investment."

The Rick’s Picks chat room was abuzz yesterday with anxious talk about a possible $100 swoon in gold over the very near term. Fears may have been stoked by a subscriber whose predictions have been prescient. Indeed, he foresaw $60 crude when it was falling into the low $30s. Although his long-term outlook for gold is quite bullish, he's looking for a sharp pullback as the summer begins. We don't see it and are instead looking for an immediate push to $1,008, basis Comex August, with a follow-through that carries to at least $1,066. It is from those heights that Gold could stall, according to our runes, but the odds are just as good that the rally could keep chugging all the way into the low $1,200s before taking a serious rest.

Bullion hasn't been paying bears much mind lately. The rally from mid-April lows is now in its seventh week, and buyers were noticeably unintimidated on the few days the U.S. dollar was strong. A possible reason for gold's steady but unspectacular climb occurred to us while reading letters to the editor in Tuesday's edition of The Wall Street Journal. Some took pot shots at an op-ed piece, "Why Beijing Wants a Strong Dollar." We find nothing exceptionable about that premise, though the letter writers' consensus was that the U.S. shouldn't rely too heavily on continued fiscal support from the Chinese government. We agreed with one in particular on stating: "Simply because the Chinese currently have a portfolio consisting of huge Treasury security holdings, that does not mean they will forever continue to throw good money after bad. . . "

Not only have the Chinese already written off more than $1 trillion in U.S. dollar exposure, they have been aggressively hedging currency risk with steady purchases of bullion in world markets. We would be surprised if China were the only sovereign entity hoarding gold against the day when the U.S. realizes it is bankrupt. And that is why we still view gold, even at the lofty price of $1,000 an ounce, and even though we believe deflation will asphyxiate debtors first, as a no-brainer investment.

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