Can Physical Gold Demand Support a Floor?

An article at CNBC was recently run suggesting gold may have hit a floor, citing HSBC, which offers three reasons why that may be the case, including retail demand from India and China, slowdown in exchange-traded fund (ETF) gold liquidation, and continued acquisition of gold by central banks around the world.

In-depth look at how physical gold will affect prices.

Forget India, China Gobbling Up Gold

Even though financial writers have been pointing to weak gold consumption in India recently, the fact is, historically, it really hasn't played much part in the movement of the price of gold, other than the seasonal impact it annually makes on the price of the metal.

China, in my opinion, is a much different story, as the Chinese government encourages its people to buy physical gold, and the government itself has been buying it up at an ever-quickening pace.

A recent note from HSBC (NYSE: HBC) said the Chinese have boosted their gold coin acquisitions from 5 kg in March to 1,857 kg in April; a huge increase by any measure.

I don't think India is weighing on anyone's minds in reference to the price of gold, as everyone that understands what's going on is looking to which governments will implement another round of quantitative easing.

That, more than anything, will cause the price of gold to skyrocket.

Much of that is centered in the sovereign debt crisis in Europe, which continues to deteriorate, with no real answers to the problem but continuing to implement austerity measures until spending comes in line with reality.

Growing pressure on Germany's Chancellor Angela Merkel to basically underwrite the outrageous spending and out-of-control benefits thrown at many people in the European Union, via eurobonds, points to the euro zone no longer really being valid. It's a joke, and gold could benefit from that exponentially if stimulus again rears it's ugly head, which many in the region are proposing, moving away from the austerity demanded by Germany from other deadbeat countries.

Merckle says it's the lack of competitiveness in the region that is the problem, not throwing more money at criminally irresponsible governments who have made promises they in no way are able to keep.

That's why they want the eurobonds, as it would require the harder working and more productive nations to underwrite the socialist and fascist nations of Europe without those nations having to pay for their horrid decisions.

Merkel chastised the leaders in the region for using the billions in stimulus already spent on consumption, instead of dealing with the lack of competitiveness and implementing real reforms.

She said, “The freedom created by this situation wasn’t exploited to improve long-term competitiveness. Instead, the time was used to spend too much money in consumption and too little time in tackling reforms.”

With all of Europe embracing Keynesianism, even the UK and France are calling for more stimulus and the acceptance of eurobonds. It's an incredible time with the fallout sure to be extraordinary.

More stimulus would obviously be a continuation of the failed economic policies of the region, yet most nations continue to call for more. They better be careful, they may just get what they ask for.

Merkel's right. If there are no changes in attitude and practice, throwing more money at it won't do anything to change the economics, it'll only give a short-term boost which will then have to be paid for as the enormous debt of the nations continue to rise.

This is all about politics, and it'll be interesting to see how it plays out as more and more politicians come up for re-election in their respective countries.

For gold prices, it could, and probably will, shoot through the roof if more stimulus is not only put on the table, but implemented.

China's Gold Strategy

There are a lot of theories being thrown around as to why China is acquiring so much gold. Everything from a failing economy to diversification are part of the media narrative.

I don't think it's primarily related to those or other assumptions, although the there is probably some truth to the diversification element of the story.

At bottom though, it appears China is positioning itself to enhance its currency, and make it much more desirable to the world, as the U.S. dollar continues to weaken because of the horrendous policies of the government and endless printing of U.S. dollars by the Federal Reserve.

With the U.S. dollar inevitably going the way of the British Pound, as far as being the reserve currency of the world, China, no doubt, wants to embrace that role with the renminbi.

This appears to be the reason the country is encouraging its citizens to acquire gold, and why it's importing so much even while it mines gold domestically at record levels.

China has a much longer timeframe than America and the West, and they'll be content to continually acquire gold in preparation for the eventual migration of the world to the renminbi as the reserve currency. It's only a matter of when, not if.

Barrick (NYSE:ABX), Goldcorp (NYSE:GG), Newmont (NYSE:NEM) as China Increased Gold Imports

The broader gold market today was soaring up till about noon, as news China has significantly increased its gold imports over the last year caused most gold miners, including large-caps Barrick Gold (NYSE:ABX), Goldcorp (NYSE:GG), and Newmont Mining (NYSE:NEM) to make nice upward moves, although as happens many times, speculators moved in and out of the market in that time frame and gold prices dropped a little after noon.

That has had more of an effect on smaller gold miners though, as the major firms are holding their share price even with the drop in price.

According to the Shanghai Gold Exchange, China has increased their acquisition of gold in 2010 to 209 metric tons as of the end of October, boosting it far above the 45 metric tons acquired in the entire year of 2009. Much of this is related to battling inflation and having larger reserves in a weak currency environment.

Barrick was trading at $53.39, gaining $0.95, or 1.81 percent, at 1:21 PM EST. Goldcorp moved up to $46.77, up $0.62, or 1.34 percent. Newmont was at $60.56, increasing by $0.91, or 1.53 percent.

Gold Prices Find Support from China Today

With gold prices continuing to be down from their historic highs, even though they've risen slightly for four days in a row, investors are reentering the gold market looking for bargains, and the news China will expand their gold market brought them out in force today.

Both spot gold and gold for December delivery were up today, with gold for December delivery rising to $1,189.8 an ounce Comex division of the New York Mercantile Exchange.

At 12:38 PM EDT, spot gold hit $1,187.10, a gain of $5.10 an ounce.

The euro continues to rally today even as the U.S. dollar falls.

China Appetite for Gold Increasing as They Battle Property Inflation

The battle by China against property inflation in the first half of 2010 has increased demand for gold in the country, according to the Shanghai Gold Exchange.

For the first half of the year, the amount of gold traded on the exchange increased by 59 percent, equal to about 3,174.5 metric tons.

It's cousin silver also performed much stronger, increasing by five times over last year.

“I expect China’s gold demand to rise by 11 to 12 percent this year to 440 to 450 tons because Chinese investors have shown their willingness to buy more when prices are on the rise,” Hou Huimin, deputy secretary-general at the China Gold Association, said today. “I expect prices will rise over the remainder of this year and next year.."

Song Yuqin, vice general manager at the Shanghai Gold Exchange, said along with property markets, other reasons for the increase in gold investing was the sovereign debt crisis in Europe and the volatility of the financial markets.

Barrick Gold (NYSE:ABX) Newmont Mining (NYSE:NEM) Agnico-Eagle Mines (NYSE:AEM), Gold Fields (NYSE:GFI) Jump on China, Sovereign Debt Fears

Concerns over the sovereign debt crisis and China austerity measures have gold mining companies like Barrick Gold (NYSE:ABX) Newmont Mining (NYSE:NEM) Agnico-Eagle Mines (NYSE:AEM) and Gold Fields (NYSE:GFI) jumping today, as they have been up from 4 to 5 percent today, while gold prices today are closing in on all-time records.

After the euphoria over the almost $1 trillion being provided to bail out European countries passed, investors have taken in the potential consequences and possible irrelevance of the $1 trillion, which many are saying will just postpone the inevitable, and after spending that much will still have to deal with the underlying causes and consequences of the economies of these countries and the response of their people to having their outrageous wages and perks being taken away.

That has investors nervous, and rightly so, and gold should be the beneficiary of that in the years ahead.

As for China, they're having to face their own potential bubble bursting, and they're putting measures into place which could cut back on demand for raw materials, which will also be a good thing for gold prices, and ultimately gold mining companies.

China Running Out of Gold?

China's Gold Supply

China has increased gold production in the country in a relatively few years to become the largest gold producer in the world in 2007. That surprised everyone at the time because to do it China's output grew at an extraordinary annual rate of 84 percent.

At that rate of production, the question must be raised as to whether China is going to run out of gold any time soon.

If they continue at the production rate they're currently at, China would run out of gold in about six years. That of course assumed no other gold is found and no mines come online.

But it does take time to get mines ready for production, so the supply of gold in China is going to pull back in the near future, and it's something to keep in mind in the years ahead.

One other interesting factor, is demand for gold in China is growing at a rate of about 13 percent annually, with the majority of that being used for jewelry. India has largely been the retail leader in that area for decades, and it didn't have much effect on the prices of gold. But add China retail jewelry demand, and you could have a demand for gold unique in history, as far as the amount of that demand is.

Right around 80 percent of China's demand for gold is from the jewelry industry.

As they get used to investing in gold - which they will because the government is encouraging them in that direction - that will create even great demand with a diminishing supply.

Anyway, we're in for interesting times for gold, and if China does begin to run out of gold, or at minimum assuredly slow down significantly in production, it's anyone's guess as to where the price of gold will go if investment demand continues for years and a significant jewelry demand from China creates a sigificant secondary market for the metal.

China Giving Gold Prices Support

China and Gold Price Support

Even though there has been a pull back in gold prices lately, leading the usual clueless commentators to question gold prices going forward, China remains a solid customer of gold, and recent changes in their laws had freed up its citizens to acquire more jewelry and hold a bunch of physical gold.

Of course this is small potatoes compared to the inflation and safety factor being priced into investing in gold, and that isn't going to change for a long time to come.

But adding the physical gold freedom in China and you have even more reason for gold to continue to rise for years to come.

China and Gold Price Support

China Tightening Weighing on Gold

China and Gold

There is a lot of speculation swirling around out there which could have a strong impact on gold if any of them turn out to be true, with one of those being China could end up tightening its money supply to cool down its economy.

With China it is believed they may raise their interest rates, which could result in not only a downward pressure on Gold prices, but possibly on other commodities as well, if demand slows as a consequence of those actions; if they're what really happens.

But with all the other positive factors for gold to remain in demand, such as inflation and currency weaknesses, gold should continue to find support at around $1,000, or maybe even more, and will be considered a buying opportunity by investors when and if it falls to lower levels.

There are too many variables to make an interest rate hike by China a major game breaker for gold, but it would have a temporary downward pressure on gold, and as mentioned, would present a buying opportunity at that time.

China may attempt to cool off its economy some, but it's not going to do cool it off too much. So including that with other factors, and gold prices should hold strong for some time to come, and eventually will resume their upward climb.

China and Gold

China Downplaying Interest in Gold

As many following China and its acquisition of gold have noted, it has shown they are nervous about their holdings of U.S. Treasury's, and China is now attempting to spin they're not as interested in gold as they were before, seeming to attempt to shore up their interest in U.S. Treasury's, even though they are a very poor investment at this time, and will be long into the future.

More than likely it is also a nod that China may be buying gold again, but doesn't want to show its hand so prices don't skyrocket and make it more expensive to acquire.

Another problem for China is it'll have to ease off buying Treasury's slowly, as it would have a detrimental impact on their manufacturing base and exports.

China has been working up growing its domestic economy in order to not need to buy into U.S Treasury's to grow its markets.

With U.S. consumers having slowed down their spending, even if China buys Treasury's it may not be that helpful to them if Americans don't turn around and buy products from the country.

So while gold is probably the better investment taking into consideration the economic climate, China has to continue playing a balancing game until their domestic economy matures more.

Until then, gold will be better for them to invest in, but for the sake of their manufacturers and exports they'll probably be forced to buy U.S. Treasury's until that changes.

So investing in gold will continue, but it'll probably be much quieter and probably not at former levels, although it's hard to tell with the Chinese which way they'll go and how they're going to do it.