A break from a short holiday for a comment on gold and on some of the views put forward by the pro-gold fraternity.  It’s rainy here in Madeira today but at least a reasonable temperature and far from the kind of sub zero weather being experienced in Canada and the USA, and the rain, storms and floods in Europe so I guess we should count ourselves lucky!

But back to gold. The strong pro-gold commentators have at least been consistent in their views on gold and where it is headed.  Indeed, they may well be partly correct in their views, but the timescales over which their scenarios will likely be played out, and the price levels likely to be reached, are indeed more wishful thinking than reality. 

True, gold made a promising start to the year, but already seems to be beginning to waver as the New York bankers and traders get back to work after the Christmas/New Year break which seems to be getting more like the European one in longevity.  One shouldn’t forget that last year’s high point for gold for the year was achieved on January 2nd and it was mostly the downward slope from then on, exacerbated by some remarkably strange COMEX trading from time to time in the process.

That is not to say that the gold price will follow the same kind of pattern in the year ahead, but one doubts it is likely to rise as far and as fast as the out and out gold wishful thinkers might have us believe.  As we have already pointed out in these pages there is still plenty of scope for downwards pressures to come into play and many of the bank analysts, for example, are predicting yet more tough times ahead for gold investors, although a downwards path throughout the year is no longer quite as unanimous among this particular fraternity – renowned for its reactive forecasts rather than its truly analytical ones.

See also: Gold price in for another tough year, but floor to be found around $1,150

There is beginning to be a feeling that gold is unlikely to fall much lower now before it might start to turn back upwards.  Indeed analysts at heavyweights like JP Morgan seem to be beginning to believe that gold will turn higher this year, although only marginally so, but the mega investment bank does seem also to be making some interesting moves in terms of its holdings of long and short positions in gold which could suggest it is indeed looking for an upturn.  It sees Indian controls on gold imports being eased, ETF outflows diminishing and central bank buying continuing – all seen as positive factors for the yellow metal.

Goldman Sachs remains bearish overall, looking for another 15% decline, while Morgan Stanley sees an initial fall and then a recovery back to over $1300 by the year end.  Barclays too reckons the gold price will struggle in 2014 in the face of an improving global economy and a stronger dollar, while Germany’s Commerzbank is also in the bear camp with its technical analysis suggesting gold could fall below $1000, although another Commerzbank analyst has an opposing view reckoning most gold-negative events have already been priced in and overall now may be a good time to invest in the yellow metal!

But, as pointed out above, bank analysts tend to be reactive and tend to change their forecasts at frequent intervals throughout the year dependent on moves seen in the gold price in the intervening periods.

What all these analysts seem to be ignoring though is the Chinese elephant in the room – and it is China, and its attitude towards gold, which may give the wishful thinkers hope that at least part of their overall  gold price scenarios might actually come about – if not this year then perhaps next.  China with its huge appetite for accumulating gold, coupled with its apparent distrust of the potential effects of the huge U.S. debt situation on the likely long term future of the dollar vs the renminbi, together with its potentially enormous financial muscle, is perhaps the one entity which could completely reverse the current gold price downtrend at a stroke.

Evidence is accumulating that current Chinese gold consumption in the runup to the lunar New Year on Jan 31st is actually exceeding total global new mined gold output over the current period.  There is strong speculation, supported by numerous reported statements at recent conferences by Chinese academics and officials, that China is heading towards attempting to totally dominate global gold holdings and by so doing hugely enhance its geopolitical and geofinancial position.  And if rhetoric is replaced by statistical confirmation then the whole gold ballgame could be turned on its head.  It is coming up to five years since China last announced an increase in its gold reserves and 2014 could well see it do so yet again and some see a revised reserve status catapulting it from the World No. 6 holder of gold to perhaps second place, behind the USA, or – some speculate – to the world no. 1.

Even if this happens the Western nations are likely to decry China’s gold holdings to be irrelevant in this current day and age, but the Western position may not hold truck with much of the rest of the world.  This tends to be far more gold-oriented and the move could thus see China winning the currency wars (after all China sees gold as the ultimate currency) which would cement its place at the top of the global financial hierarchy, if not immediately then only a short time ahead.  The Western bankers and traders are ignoring the Chinese position at their peril.

If this Chinese scenario is correct, and there seems to be a huge accumulation of evidence that it is so, then China could control the gold price totally should it so wish.  An upwards revaluation would leave its money-earning populace, which it has been encouraging to buy precious metals, substantially wealthier (and happier) and initiate a consumer boom, thus replacing, almost at a stroke, its current reliance on exports to keep its economy growing, while the West continues to stagnate.

So gold’s wishful thinkers could well be correct – perhaps not for the principal reason they have been so pro-gold all along, which has largely been based on fears of a calamitous collapse of Western economies – but for the downgrading of the West against the East as the latter begins to dominate the global economy.  Western economies probably won’t collapse, although they will remain exceedingly precarious for the next few years as the global financial crisis plays out – but the overall winner does look like being China!

In the past such a sea change in the global balance might have led to the assertion of a once dominant nation’s position by military conflict, but major power weaponry and delivery systems have become so sophisticated that costs in terms of casualties and industrial destruction are too potentially horrific for a global war to be contemplated.  China has perhaps created enough doubts through its success in landing a Moon rover, and its program to land a Mars rover inside four years,  for its potential long range military capabilities not to be underestimated.  Nobody wants to start a war which could lead to the near annihilation of one’s own nation and with no winner at the end!

So, although gold could well face a choppy year or two as global geopolitics play out, should China develop the way it appears to be progressing both technologically and financially we may well get to see gold playing an ever-increasing role in global finances and it would not be surprising should it become at least a part of some future global reserve currency and its effective price control move away from the U.S. and London markets to settle in the East.  And that would indeed be positive for the gold wishful thinkers – but perhaps it won’t settle anywhere near the huge figures the mega bulls have been predicting, but comfortably higher than it is at the moment.