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China Accumulates Gold: Buy The Dip, Bear Cycle Is Ending

(Kitco News) - The Chinese central bank continues to see wisdom in diversifying into gold as it purchased another 9 tons in March. Older economy central banks possess large holdings of gold, but emerging market central banks remain under allocated to gold. Diversification by emerging market central banks remains a strong underlying bullish factor for the gold market in the years ahead.

Central bank buying of gold is only one of the many underlying bullish supports for the yellow metal right now. Other positive factors include the historical low interest rate environment in the U.S. and the move to negative rate policies by major advanced economies. Investment demand is running high as individuals remain concerned about the sluggish growth worldwide and the debasement of fiat currencies by global central banks.

Who's Got The Gold?

Take a look at the latest statistics from the World Gold Council below. Year-to-date, the majority of fresh central bank gold purchases have stemmed from China and India, at 35 tons and 32.5 tons, respectively. Most analysts do not expect any net gold selling from older advanced nations and emerging market nations are expected to continue buying gold to beef up diversification.

Figure 1: International Financial Statistics, April 2016
Source: World Gold Council

 

Is The Gold Bear Cycle Over?

The first quarter of 2016 was stellar for the gold market as it chalked up a 17% gain and beat all major stock and bond indices.

  • The significant rally wave begs the question: is the bear cycle that began at the all-time high in 2011 ending?
  •  The answer is: maybe yes.

The World Gold Council crunched the numbers and found that "Previous bear markets (excluding the current one) have had a median length of 52 months, during which the price of gold declined between 35% and 55%. As of December 2015, gold’s price pullback was already in line with the median length and magnitude of these previous bear markets." See Figure 2.

 

Gold: Buy The Dip Says BofA Merrill Lynch

Figure 2

 

In addition to the fundamental bullish catalysts, the long-term chart is improving for the gold market as well. Both fundamentals and technicals are positive.

"The monthly chart of gold prices show a downward sloping channel has been broken in bullish fashion," says a BofA Merrill Lynch Global Research report. "We first became bullish on gold on January 18th and provided additional updates throughout the quarter. We remain gold bulls and would like to buy on a pullback at support in anticipation of a resumed up trend to 1,315 and 1,375," according to the BofA Merrill Lynch Global Research report.

See Figure 3 below.

Figure 3

 

Chart take: The monthly gold futures chart reveals a bullish momentum divergence in the monthly relative strength index, shown below the price action. The RSI indicator failed to confirm the new gold price low in December 2015, as momentum registered a higher reading than June 2013. Sustained readings above the 50% line are needed to confirm a bullish momentum turn.

By Kira Brecht, contributing to Kitco News;

 

 

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 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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