Chinese Gold Moves Setting the Market Up for a Price Spike

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". . .time for the inscrutable Chinese to smile and talk of support for a strong dollar while bailing out of this asset class by the back door."

It is interesting to hear a senior economic researcher from the Chinese Communist Party calling for bigger gold purchases by China to diversify away from the U.S. dollar whose devaluation looks inevitable with the printing of money to finance deficits.

This conclusion from Li Lianzhong, head of the party's policy research office, came in a statement late last week but is only the latest indication of the way the wind is blowing in the People's Republic.

Golden Opportunity

'Should we buy gold or U.S. treasuries?' he asked. 'The U.S. is printing dollars on a massive scale, and in view of that trend, according to the laws of economics, there is no doubt that the dollar will fall. So gold should be a better choice.'

In the past six months China has also lent $45 billion to Russia, Brazil, Venezuela and Kazakhstan in exchange for long-term crude oil supply deals. Oil is black gold and a hedge against U.S. dollar devaluation.

Where the logic of experts like Mr. Lianzhong breaks down is that while China might diversify away from the U.S. dollar gradually, any sudden devaluation of the greenback would badly impair the value of its massive U.S. T-bond holdings.

This then looks a time for the inscrutable Chinese to smile and talk of support for a strong dollar while bailing out of this asset class by the back door. Buying gold, silver and industrial commodity assets are a neat way to achieve this objective.

Price Spike Imminent?

However, by monetizing gold in this fashion international investors will surely appreciate that a floor is being put under the gold price, with the prospect of upwards-only price revision.

It is exactly this kind of impossible-to-lose investment scenario that produces price spikes, and if you look at the longer-term technical chart for gold it does look remarkably similar to the Nasdaq in the late '90s before it really took off.

In that case, Chinese gold buyers would be well-advised to speed up their purchases before they miss the boat on gold prices.

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