Gold Can pass $1,000 if China Shifts Away From U.S. Treasurys
Posted June 27, 2009on:
Gold could go well above $1,000 an ounce in the next couple of years, according to some people bullish on the metal, who say China could boost the yellow metal’s price significantly if it takes the policy actions one of its research officials is advocating.
A Chinese academic with ties to the Chinese Communist Party says the People’s Republic should buy more gold and diversify its nearly $2 trillion in foreign exchange reserves away from U.S. Treasurys.
Li Lianhzong, director of the economic bureau at the party’s China Central Policy Research Office, made the comments at a forum in Beijing that also covered the broader topic of China’s currency on the world financial stage.
Li was cited by Dow Jones Newswires as saying China needs to increase the value of its foreign exchange reserves — the source “from which we create our fortune.”
U.S. land and energy products should be at the top of China’s shopping list, according to Li, who also says China should be accumulating more gold to hedge against the risk of a falling dollar which would diminish the value of its U.S. Treasury holdings.
Similar comments about gold were made at the forum, further heightening speculation that China has been a big buyer of gold, keeping the metal above the $900 an ounce level.
To Scott Travers, coin dealer and author of The Coin Collector’s Survival Manual, the Chinese comments come as no surprise. To him, it’s just one of several bullish factors that he expects will propel the yellow metal to new highs.
“I am completely and absolutely convinced that despite short-term gyrations, gold will shoot through $1,000 an ounce and continue going straight up.”
Travers continued, “when gold does hit $1,000 this time around — and it will — there will likely be no turning back, so I foresee $1,500 to $2,000 gold by early 2011.”
He characterizes pullbacks in gold as “gifts”and says, “the gold naysayers just don’t get it.”
At the heart of the matter, says Travers, is the state of the dollar, which he expects will weaken as the U.S. government is forced to sell more debt to fund annual federal deficits in excess of $2 trillion.
It’s the gloomy outlook for the dollar that has China on guard against risk in its holdings of Treasurys and more loudly suggesting the need for a new international reserve currency.
The Chinese academic, Li, told the forum in Bejing that the Chinese currency, the yuan, should be given an equal 20% weighting with the dollar, euro, pound sterling and yen in an International Monetary fund basket of currencies.
The U.S. dollar with a 44% weighting presently dominates the basket known as Special Drawing Rights currencies, or SDRs. Li would like to see the yuan added to the basket next year when the SDR basket comes up for review.
Li’s remarks are seen as a signal that China will continue to pursue a new world reserve currency other than the dollar. That, says Travers, will result in opportunity for investors in gold, a commodity denominated in dollars. As dollars weaken, he says, gold and other metals will rise. Travers says the world will eventually come to grips with the reality that gold and silver are the only real money.
Some are not as bullish on gold’s prospects.
John Nadler, senior analyst of precious metals company Kitco says over the next several months gold’s range will likely “remain between $680 and the $980 area.
He says it’s been a “struggle” for the gold bulls at the four digit level and that the “onous is on them to prove if we’re in the midst of a hypercyle for gold”
“Despite the Armageddonish headlines, the sky ended up not falling and the dollar retains its reserve currency status.” Nadler believes the talk of a the need for a new world reserve currency is merely “jawboning by the Chinese.”
Longer term, Nadler says the jury is still out on whether gold can go deep into four-digit territory. For gold to move to $3,000 to $4,000 an ounce, Nadler says “Kim Jong il would have to go nuts” with his nuclear weapons.