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QE To Infinity Out. Gold Demand To Infinity In

Tuesday December 10, 2013 15:42

  1. Bloomberg News reports that gold held in ETPs (exchange traded products) declined again, over the past week.  To view a chart of these consistent outflows, please click here now.
  2. Gold is a timeless investment, and that means different themes dominate the market at different times.  In the 1970s, American investors dominated the gold market.
  3. China & India were irrelevant to gold prices then, because they had no real purchasing power.  Chinese citizens were forbidden from buying gold, and India was simply too poor to buy significant tonnage.
  4. The gold market staged a parabolic advance in 1979, because of Western citizen buying.  A horrible collapse followed in 1980.  Fearful Western investors sold because Paul Volker raised interest rates dramatically.  Indian citizens did buy gold all through the bear market that followed, but supply overwhelmed their demand. 
  5. The rise in the gold price from 2008 to 2011 revolved around a quantitative easing (QE) theme.  Again, investors in the West were a key price driver, but buying from China and India increased tremendously.  Most of that Chindian buying revolved around a gold jewellery theme, rather than QE. 
  6. Do most QE-oriented gold investors in the West fully grasp the ramifications of the massive increase in Chindian citizen demand for gold jewellery?  If they did, I don’t think they would fear a QE taper at all.
  7. In my professional opinion, the Fed will taper QE to zero over the next 12-18 months.  Is that bearish for gold?  No.
  8. Most of the weak hands in the gold market that bought gold based on a “QE to infinity” theme are gone.  When the taper starts, there simply isn’t much QE-oriented gold left to sell.
  9. In 1980, an event like a QE “taper to zero” would have caused gold to crash.  In 2014, demand from China and India should more than offset all the gold that could be sold by QE-oriented investors.
  10. In the 2014 – 2016 timeframe, the actions of people like Narendra Modi in the Indian gold jewellery arena are likely to be vastly more important to the price of gold, than the actions of Janet Yellen in the QE taper arena.   
  11. That’s because physical demand versus mine supply is what ultimately moves the gold price in its primary trend. 
  12. Growing demand from the enormous Chindian middle class is on track to totally overwhelm mine supply.  Incredibly, there are about 500 million Indian citizens that are under the age of 25.  The coming demand for gold, from this emerging gold buyer class is truly mind boggling. 
  13. QE to infinity” is on the way out, and GDI is in.  What is GDI?  It’s “gold demand to infinity”. 
  14. ‘"It is time to taper,'' Dallas Federal Reserve Bank President Richard Fisher said in remarks prepared for delivery to the DTN/The Progressive Farmer AgSummit in Chicago.’ – Reuters News, Dec 9, 2013.
  15. Ironically, Fisher’s tapering statements could be bullish for gold.  “Stephen Williamson, an economist at the St. Louis Fed, has conjured up quite a storm of controversy with his claim that quantitative easing could be deflationary.” – CNBC News, Dec 9, 2013.  
  16. In my professional opinion, it is time to taper to zero, and the taper to zero is bullish for gold. 
  17. From the standpoint of technical analysis, how does gold look?  Please click here now.  That’s the daily gold chart, and there’s arguably a double bottom pattern in play.  The first low came near $1180 in June.  The second low could be forming now.  After struggling for several weeks, my stokeillator (14,7,7 Stochastics series) has produced a crisp buy signal, and the lead line is moving aggressively higher.  The short term target suggested by the stokeillator action is $1305.  The double bottom target is about $1680. 
  18. As the taper begins, banks purchase less US dollars with OTC derivative securities, putting pressure on the value of the dollar.  Outstanding OTC derivatives remain marked to model, so they are not deflationary. 
  19. Please click here now.  You are viewing the daily chart of the US dollar against the Indian rupee.  The dollar has broken down from an ominous head and shoulders top pattern.  A stronger rupee will encourage the Indian government to allow more gold to be imported, and that’s bullish for the price.
  20. A QE “taper to zero” could create a significant sell-off in T-bonds.  That means higher interest rates, and higher interest rates can force struggling corporations to increase product prices.  Higher prices are inflationary, and inflation increases demand for gold.
  21. Gold stocks should do well during a “taper to zero” event.  Please click here now.  That’s the daily chart for GDX.  The stokeillator has been “staggering” along in the oversold zone, but now it appears to be turning up into a more solid buy signal. 
  22. There’s no question that ongoing tax-loss selling is a factor in price discovery right now, but there’s only a few more weeks to go, until 2013 is done. 
  23. Gold mined from gold mines is the only way that growing and insatiable demand from the Chindian gold buyer class can be met.  Gold stock owners may be in for a very big positive surprise in 2014!

Stewart Thomson 
Graceland Updates

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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