On February 19th I wrote an Early Look titled “Long America, Short Gold”. For those of you that are new readers, I point that out for accountability purposes as I recall taking plenty of heat from the momentum chasing community for shorting gold.
Having already laid claim to people being “too bullish” on gold then (citing Einhorn making it his largest position at the time!), I beg for your attention to hear me know – I think consensus on gold is no longer bullish enough.
Most of you know that I want to be long what The Client (China) needs, and short what American bankers want them to need (US Treasuries, US Dollars, etc…). Gold is one of those things that China needs a lot more of. China recently reported holding 34M/oz of gold (1054 tons), but that makes them only the 5th largest holder of gold, globally, despite having the most open currency to buy more with.
There are 2 numbers that really matter here:
- $1.4 Trillion – that’s $1.4T out of a total $2T in Chinese reserves are in US Dollars/Treasuries
- 1.6% of Chinese reserves are in Gold
The average central bank holds at least 10% of their country’s reserves in gold. The Chinese are not interested in gaining exposure to any more US Dollars. Therefore the demand equation here is very straightforward. China needs more gold.
To get to 10% of reserves in gold China would actually need to buy another 5,000 tons. So next time someone tells you “the IMF” is selling 100 tons, send them the math in reply.
Gold, contrary to Mr. Bernanke missing it (inflation coming in Q4), is now breaking out to the upside. Andrew Barber and I have outlined all 3 durations for the price of gold in the chart below. Long term TAIL support remains $871/oz, and the immediate term breakout TRADE line = $931/oz.
Keith R. McCullough
Chief Executive Officer