Gold Price Prediction Based On Technical Analysis & China Demand

March 3, 2014

 

Since September 2011 gold has been consolidating in a traditional bear market correction. However,  this Gold Bear is already too long in the tooth when compared to all Bear Markets since 1972. In the period 1972-2006 there have been 13 Gold Bear Markets. The average Bear Market saw gold losing -33% of its value over an average period of 538 days.  Compare this to the current Bear Market where the gold price has fallen -38% in approximately 660 days. Ergo, one may reasonably conclude the present Gold Bear is indeed very long in the tooth – and most probably ended with the creation of the bullish Double Bottom at about $1190. Please see supporting analysis Gold To Rise Like The Proverbial Phoenix In 2014-2015”  

Weekly Technical Analysis strongly suggests a new Gold Bull has been born. Recently gold has effected a 16-month upside Break-Out. Moreover, the shiny yellow has forged a bullish Double Bottom at about $1190. Furthermore, technical indicators MACD, RSI and CCI have put in solid bottoms and are bullishly rising in concert.

Also looming on the horizon is The Golden Cross (ie where the 50 dma crosses above the 200 dma). The equivalent 10-week moving average has turned bullishly upward and will soon cross above gold’s 40-week Moving Average, producing a strong Long-Term Buy Signal known as The Golden Cross:

Gold Price Prediction based upon the Technical Analysis and the Bull Run Statistics:

The average bull market in Gold lasted 434 days with gains of 94.89%.  Projecting this historical average to the upcoming bull market, one might see the shiny yellow top $2,315/oz by mid-2016.

The China Factor

The above gold price prediction of $2,315 in mid-2016 is based on Technical Analysis and the stats of gold bull and bear markets since 1972. However, the wild card in the golden deck is CHINA. Today, China is the world’s largest consumer of GOLD.  The Sino nation surpassed India in gold demand in 2013.  China has four pressing reasons why its gold consumption will go viral in the not too distant future:

  • Few Investment Alternatives
  • US Treasury Holdings and
  • The covert objective is to have a gold backed Renminbi (yuan)
  • China’s Money Supply exploding 3 times faster than USA’s M2

Few Investment Alternatives

During the past five years the Shanghai Stock Exchange Index has appreciated a miserly +2%, while the price of gold has soared a +77%.  The obvious choice of profitable investment for China’s citizens is gold.

US Treasury Holdings

The chart below shows the most recent holdings from the TICS report of Chinese Treasuries in a nutshell:

Chinese U.S. Treasury holdings plunged by the most in two years, after China dumped some $48 billion in paper, bringing its total to only $1268.9 billion, down from $1316.7 billion, and back to a level last seen in March 2013!

This was the second largest dump by China in history with the sole exception of December 2011.

That this happened at a time when Chinese FOREX reserves soared to all-time highs -- and not investing in US paper should be quite troubling to anyone who follows the nuanced game theory between the US and its largest external creditor, and the signals China sends to the world when it comes to its confidence in the US.

(Source:   http://www.silver-phoenix500.com/article/fed-still-pumping-fdi-goes-negative-bear-stearns-lehman-level-foreign-flows )

One must wonder what is China’s motive in selling U.S. Treasuries?  Actually, there are two cardinal reasons for China beginning to dump Uncle Sam’s fiat paper. FIRSTLY, there is the substantial risk of monetary loss.  T-Bonds have been in an uninterrupted and unprecedented BULL MARKET FOR THE PAST 30 YEARS (since 1984).  And everyone knows ALL BULL MARKETS eventually end.  Moreover, T-Bonds values will eventually fall as U.S. interest rates will most likely rise in 2014 and for years to come.  Needless to say rising interest rates will cause the value of the 30-Year Treasury to decline into BEAR MARKET MODE. Understandably, China will necessarily increase the frequency of dumping as the value of T-Bonds declines in order to minimize its loss. Everyone must remember China is the world’s largest holder of US Treasuries. Consequently, China will rapidly accumulate a herculean amount of US dollars from the sale of these bonds. And common sense dictates China will use the growing stash of US dollars to buy gold. Today, China still has $1.3 Trillion invested in T-bonds ($1,300,000,000,000).  This represents an ocean of demand for the shiny yellow, which could well send the price of gold into orbit…depending on how fast China wants  to convert its US Treasury holdings into gold.

It is pertinent to recall that China’s Total Foreign Reserves are backed by less than 2% gold vis-à-vis the U.S. Total Foreign Reserves that are backed by 75% gold.

China will panic when T-Bonds collapse below the 30-year trendline:

The covert objective is to have a Renminbi (yuan) backed by gold

Renminbi Is Destined To Replace The US$ As The Global Reserve Currency…But When?!

PRESENTLY, there is precious little that really gives the Chinese Renminbi a significant competitive edge over the U.S. dollar. However, if Chinese authorities truly want the Renminbi to replace the U.S. dollar as the primary reserve currency of the planet, the People's Republic of China needs to do something that will make the rest of the world want to use it.

To be sure this is feasible by backing the Renminbi with gold. In fact, there are persistent rumors from Chinese authorities in recent months that indeed China has been busily preparing for that objective.

Lastly and surely China has money coming out the wazoo! China’s Money Supply M2 since 2001 has had a Compound Annual Growth Rate (CAGR) of 19.4%. (which is three times the money supply expansion in the USA of only 6.3%).   This is an uncanny comparison with the Renminbi price of gold that has enjoyed a CAGR of 16.9% in the period from 2001-2012.  Apparently, the Renminbi price of gold rises in direct proportion with the increase of China’s Money Supply M2.  And the following chart shows no let-up in China’s M3 Money Supply Growth, which has actually accelerated during the past six years:

Related articles and analysis:

Rising Gold Prices Will Be Fueled By China Dumping U.S. Treasuries

A Gold Backed Renminbi (Yuan) Looms On The Horizon

And here’s the bottom line: 

In light of gold’s recent material rally year to date, gold may be subject to a brief consolidation to around $1,275-1,300  in the short-term.

However, based solely on long-term Technical Analysis, one might see the shiny yellow top $2,315/oz by mid-2016.

Nevertheless, the wild card China Factor may well fuel the price of gold into orbit in the next few years…much, much higher than $2,315.

 

 (Chinese for Gold) …Bank on it !!

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Founder of Gold-Eagle in January 1997.  Vronsky has over 42 years’ experience in the international investment world, having cut his financial teeth in Wall Street as a financial analyst with White Weld. Vronsky speaks three languages with indifference: English, Spanish and Brazilian Portuguese.  His education includes a degree in Petroleum Engineering from the University of Oklahoma, a Liberal Arts degree from Hartnell College and a MBA in International Business Administration from UCLA – qualifying as Phi Beta Kappa and Tau Beta Pi for high scholastic achievements.  Vronsky believes gold and silver will soon be recognized as legal tender in all 50 US states…and many countries worldwide.  You may reach I. M Vronsky at: vronsky@gold-eagle.com and/or vronsky@bellsouth.net

18 karat gold is 75% pure gold.

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