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Gold Price Tsunami Ahead, Says Sprott

Release Date: 
Wednesday, February 9, 2011

GOLD PRICE - The gold price climbed $1.80 to $1,365.60 per ounce Wednesday as the price of gold traded firm amid selling pressure on global stock and commodity markets. On the heels of China's third interest rate hike in the past four months, emerging market equities fell for the fifth consecutive day. Gold prices, which rallied nearly 1% yesterday, have been buoyed by strong physical demand out of Asia.

Despite closing at its highest closing level since January 3, the price of gold remains lower by 4.0% year-to-date. While the gold price has underperformed cyclically-sensitive commodities thus far in 2011, its resiliency was on full display yesterday. Gold prices powered higher despite a further tightening of monetary policy in China and weakness in oil. The People's Bank of China (PBOC) hiked its benchmark one-year deposit rate by 25 basis points to 3.0% to cool its surging property market and stem the tide of rising inflationary pressures.

The ability of the gold price to advance in the face of higher rates in China may be a sign that the recent correction in the yellow metal is nearing an end. Although the price of gold has fallen in 2011, it remains within 4.8% of its $1,431.50 all-time high. One reason for the resurgence in the gold price is that, contrary to conventional wisdom, investors are not convinced China is willing to aggressively fight inflation at the same time that the U.S. Federal Reserve and European Central Bank (ECB) keep monetary policies at crisis levels.

Eric Sprott, founder of Sprott Asset Management, provided another Chinese-related rationale for his firm's positive gold price outlook. In his latest monthly letter entitled "Gold Tsunami," Sprott and colleague David Franklin attributed the resurgence in gold to the potential for massive gold demand from China and India. "The scale and speed with which they are accumulating precious metals IS new, and it's driving the fundamentals," noted Sprott, who asserted that this demand will result in higher gold prices in 2011.

As a catalyst for this growing trend, Sprott pointed to the Industrial and Commercial Bank of China's Gold Accumulation Plan (ICBC GAP), which "speaks to the new era of gold investment within China." Launched in April 2010, the program allows investors in mainland China to purchase gold through a daily dollar averaging program. Thus far, the IBCB GAP program has led to the purchase of over ten metric tons of gold. Sprott asserted that the program's growth prospects suggest this figure could rise to 300 metric tons per year, which would represent more than 10% of estimated annual global gold production.

If the program were to be launched in other large gold-consuming nations such as India, Russia, or Turkey, Sprott contended that the demand for gold would begin to "overwhelm" supply. Moreover, "while the world continues to float on a sea of paper, this massive wave of physical demand silently threatens to crash into the physical gold and silver market, potentially wiping out tangible supply."

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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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