Gold Nearing Tectonic Shift

Release Date: 
Friday, May 22, 2015

Gold and Silver Prices
Gold prices rose on Friday but still remained below last week’s three month highs as investors digested the Federal Reserve’s April minutes for clues of an interest rate hike.

“Gold rose on Friday as the dollar's rally stalled ahead of U.S. inflation data, but the precious metal was still on course for its biggest weekly decline in four weeks… ‘There is consensus among analysts that the rate hike is now being pushed back to September, but the risk is the Fed will postpone the rate hike towards the end of the year or even the beginning of 2016, which could be supportive.’” (“Gold set for biggest weekly drop in four despite dollar stall,” Reuters, 5/22/15.)

Gold finished the week down $17.60, closing at $1,206.90. Silver prices closed the week at $17.08, down $0.52.

Gold Nearing Tectonic Shift to “Explosively Higher Gold Price”: Taylor
Kitco Commentator Jay Taylor reviewed the charts from technical analyst J. Michael Oliver, concluding that gold is prepared for a tectonic shift upward.

“I get the sense that we are approaching a tectonic shift in many key markets, and of course the canary in the coal mine to let us know an explosion or implosion in the major markets is about to take place would be an explosively higher gold price… I carefully monitor the pulse of the gold markets and other key markets through the ingenious work of J. Michael Oliver (visit to try be as ready as possible for this big event…

“Oliver's work is strongly suggesting that we are nearing …  a major bottom in gold… I firmly believe we are on the edge of the next and final leg up in the secular bull market that started in 2002.” (“Gold: Heads Up!” Kitco, 5/21/15.)

Bloomberg: Chinese Gold Standard Would Require Gold Price to Increase 50x
A report from Bloomberg Intelligence considered how much gold would be required to support a gold-backed Chinese currency.

“A move to a gold standard in China would require an exchange rate of as much as $64,000 an ounce, 50 times bullion’s price now, according to Bloomberg Intelligence... Chinese policy makers are trying to establish the yuan as a reserve currency, and backing it with gold would help attract foreign capital inflows, the Bloomberg research unit wrote. Theoretically, to create an exchange rate of one ounce of gold for every $64,000, the country would need about 10,000 metric tons of the metal, they estimated. That’s nine times the nation’s official holdings and about 6 percent of all the bullion ever mined globally.

“’It would probably have to be very different than an old gold standard,’ Kenneth Hoffman, the Princeton-based head of global metals and mining research at Bloomberg Intelligence, said in an interview in London on Tuesday. ‘They have all this currency out there, they want it all soaked up by central banks… It wouldn’t be a traditional system where you walk into a bank and you walk out with an ounce of gold. It would have to be something new and different… The Chinese have proved over and over that they are willing to think outside the box.’” (“Chinese Gold Standard Would Need a Rate 50 Times Bullion’s Price,” Bloomberg, 5/20/15.)

Bank of America Merrill Lynch: Increase Gold and Cash Holdings
In a note to investors, analysts at Bank of America Merrill Lynch warned that volatility and “flash crashes” require investors to increase their holdings of gold and cash.

“Investors remain trapped in “The Twilight Zone”, the transition period between the end of QE and the first rate hike by the Fed, the start of policy normalization...until (a) the US economy is unambiguously robust enough to allow the Fed to hike and (b) the Fed’s exit from zero rates is seen not to cause either a market or macro shock (as it infamously did in 1936-7), the investment backdrop will likely continue to be cursed by mediocre returns, volatile trading rotation, correlation breakdowns and flash crashes. For this reason we continue to advocate higher than normal levels of cash, adding gold and owning volatility in mid 2015. Given extremities of liquidity, profits, technological disruption, regulation, income inequality… potential for a cleansing drop in asset prices cannot be dismissed.” (“Bank of America: Markets Are in a 'Twilight Zone' and It's Time to Hold More Cash and Gold,” BloombergBusiness, 5/18/15.)

Greece May Be Required to Create Parallel Currency
Greece may have to bring in a "parallel currency" if progress stalls in negotiations with the country's European creditors, according to Wolfgang Schaeuble, the outspoken German finance minister.  Bloomberg reports that during a private meeting Schaeuble mentioned the idea of Greece's bringing in a second currency — which could be the first step to a messy exit from the eurozone…

During the worst parts of the euro crisis, the threat of Greece exiting the euro was seen as an immediate problem for the whole bloc. If the Greek banking system collapsed, other European countries feared it could drag the rest of southern Europe with it and destroy the monetary union. This time many finance ministers are much less cautious and regard the possibility of a potential Grexit (Greek exit from the eurozone) as much less risky for their own countries. Some German officials have reportedly suggested Greece should be cut out of the currency union like a ‘gangrenous leg.’" (“Germany's finance minister says Greece may have to invent a 'parallel currency,’” Business Insider, 5/22/15.)

China May Become the Next Greece
China could be the next Greece and its debt woes may even exceed the European country’s in the next few years, predicts prominent hedge-fund manager Jim Chanos of Kynikos Associates… The perennial China bear pointed to China’s debt-to-GDP ratio of nearly 300% and projected that the ratio is likely to balloon to 400% over the next few years… ‘The problem is the credit story,’ Chanos said. ‘China’s banking system is bloated and it’s basically taking on more and more leverage…’

“China’s total debt hit $28.2 trillion in 2014, equivalent to 280% of its gross domestic product, according to The Wall Street Journal. Chinese monetary officials earlier this month lowered interest rates to combat a worse-than-expected economic slowdown as companies and governments struggled under heavy debt.” (“Why Jim Chanos thinks China could be the next Greece,” MarketWatch, 5/22/15.)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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