Gold Price Still a Reflection of US Economic Health

Gold prices have been on a roller coaster ride recently, starting with a massive sell-off, followed by a frenzy in the physical gold market. “Chinese aunties” were reportedly buying in such volumes that the global markets were visibly moved. Although some media later claimed that these rumors were false, it is still a topic worth exploring.

Gold is not a normal commodity; it is unique in its role as money. In theory, this role ended with the collapse of the Bretton Woods System, yet each time there is major political or economic upheaval, people scramble to buy gold as a safe-haven asset. Today, as countries successively ramp up their money printing, a currency’s real purchasing power is increasingly difficult to measure. As a result, the desire for real wealth and value is on the rise, once again highlighting gold’s monetary attributes. Since the financial crisis of 2008, the hegemony of the U.S. dollar has been questioned and gold prices have repeatedly reached new highs.

It is not hard to see that the main reasons for gold’s strength are the slow pace of U.S. economic recovery, the unsolvable nature of the U.S. debt crisis and the reliance on unrestrained dollar creation to prevent a drastic contraction in U.S. dollar assets. Owing to distrust of the U.S. dollar and fears of inflation, gold has been popular as the ultimate safe-haven asset. Each time the U.S. dollar index declines, negative U.S. economic data are released or the Federal Reserve announces plans for quantitative easing, gold prices rise.

So how do we explain the recent fall? Again, we have to look to the U.S. The U.S. claimed that its economy was recovering well, but many metrics still paint a shaky picture. And while the debt crisis appears to have abated for now, it is far from being solved — indeed, there is no solution in sight. Regarding the recent price drop, there are several points to note. First, there have been no major changes in the political and economic factors affecting gold prices. Secondly, it was mainly triggered by several bouts of concentrated selling, with volumes reaching 10 million ounces, or 300 tons, in the space of 30 minutes. This selling was precisely timed to occur during the most active trading hours in New York and when important overseas markets, including London, were still in session. It was also largely conducted by a handful of U.S. institutions. Thirdly, much of the prior negative “news” — such as that of the central bank of Cyprus planning to sell its gold reserves — was later proven false. Therefore, it is not too bold to assume that manipulation conducted for the sake of U.S. interests caused the recent pressure on gold prices. The goal was to undermine the market’s confidence in gold, reinforce confidence in U.S. dollar-denominated assets and consolidate U.S. dollar hegemony.

Nonetheless, the markets are ruthless. While the massive influence exerted to undermine gold did create a storm in the markets, there still truth in the Chinese proverb that ice a meter deep is not frozen in one day; that is, the U.S. economy’s downward trend and debt crisis are not so easily forgotten. After the manipulated plunge, gold prices have been gradually recovering.

At the moment when markets around the world were indiscriminately bashing gold, “Chinese aunties” unexpectedly stole the spotlight. But, in fact, although countries like China and India are major gold consumers, their impact on international gold prices is quite limited. We still lack a voice in the international gold trading arena. And while gold may not necessarily be in a bear market, the U.S. is drawing upon its political and economic strength, as well as public support, to slowly embark on the path to recovery. At this time, the questions of paramount importance to us are how to accumulate gold effectively among our nation and our people, how to invigorate gold trading and seize the initiative in setting gold prices, and how to take a central role in the international gold and financial markets.

The author of this article is chief economist of the China National Gold Group.