Chinese a far more important factor in gold prices going forward than Fed QE tapering

Posted on 29 January 2014 with 2 comments from readers

US investors went cold on gold last year because the spectre of Fed QE tapering promised higher interest rates that make gold investments less attractive. But this narrow view point missed the bigger picture entirely as the Chinese used this opportunity to corner the gold market like the Hunt Brothers did with silver in 1980 (click here).

Chinese demand is a far more important determinant of gold prices going forward than QE tapering by the Federal Reserve. Just look at other markets.

Last year China overtook France as the world’s biggest consumer of red wine. Think what that has meant for wine prices over the past decade. First growths went to being affordable by the Western middle classes to being for the one-per cent only.

Follow the money

Follow the Chinese money with your investments and you won’t go far wrong, especially on commodities. Then again Fed tapering of QE does have something to do with the Chinese enthusiasm for gold.

For the Fed’s actions herald higher global interest rates and that’s toxic for China’s bubble economy. India and Turkey hiked their interest rates yesterday, who’s next? And what will that mean for highly inflated local asset prices? Think Chinese real estate and stocks.

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And what can they invest in that has an internationally set price level that will resist the worst of this asset price slump. Step forward the king of the precious metals, although silver will probably still outperform as its supply situation is far tighter than gold.

Investors who can rise above the noise of the futures pit and think in terms of macro trends will win with precious metals. That said there is a huge short position tripwire at $1,270-1,275 waiting to be broken.

$7,000-9,000 gold

Once that hurdle is passed gold prices will take a leap upwards again. From the sell-off last year that mirrored a similar collapse in 1975-6 we should now get the sevenfold increase in prices that took gold to a peak in 1980.

That would put gold prices in the $7,000-9,000 range as ‘Currency Wars’ author Jim Rickards has articulated (click here).

Just as with red wine the Chinese will have turned what was an affordable commodity into an expensive luxury. Stick with the one-per cent guys this time around.

Only our paying subscribers will get the full story on gold this month from ArabianMoney (click here). We’ve plenty of actionable investment advice in the February edition out today that we can’t give away for free on this website!