Gold Prices: Huge Change in Gold Market Could Send Prices Soaring

This Could Send Gold PricesSoaring

Don’t be discouraged by small fluctuations in gold prices on a daily basis. They’re nothing but the result of noise and speculation. Keep your focus on the long-term—gold bullion has a great future ahead.

There are a few things to pay attention to when trying to assess the gold market, but one of the biggest factors investors shouldn’t ignore is China.

If you look closely, you will see there’s significant demand for gold bullion from China—consumer and official demand. And, this demand surprisingly is inelastic, meaning it’s non-responsive to what gold prices do.

Going back a little, since their peak in 2011, gold prices have declined more than 30%. In this time, one would expect the demand for the precious metal has declined, too. In China, this hasn’t been the case.

In fact, it has been the complete opposite of what was originally anticipated. We were told buyers will run away as gold prices remain suppressed.

With this said, consider the central bank of China. In June of 2015, it reported that between June 2009 and June 2015, it added 604.34 tonnes of gold bullion to its reserves. This move wasn’t surprising. It was expected all along.

What’s interesting to note is that it continues to add gold to its reserves. Between July of 2015 and December, the central bank purchased closed to 104 tonnes of gold bullion. Then, in January of this year, it added more—16.7 tonnes of the precious metal. (Source: “Changes In World Gold Official Reserves,” World Gold Council, last accessed March 16, 2016.)

Here’s something to keep in mind: don’t be too quick in thinking that the central bank of China will stop buying gold anytime soon. The Chinese currency was recently added to the International Monetary Fund’s (IMF) Special Drawing Rights (SDRs) basket. This means that China has to back its currency and gold could really help.

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