Silver, Gold Move on China Buying

You can always make money buying ahead of the Chinese because while a herd of 300 million Americans is big, a herd of 1.3 billion Chinese is bigger.

Now there's word the Chinese are moving back into gold and silver.

ZH: The Chinese Start Buying Silver: BofA Says "Momentum Breaks Out To Highest In Years"
As we reported earlier, the buying accelerated this morning, when ongoing demand for the precious metal pushed it to fresh 10 month highs above $17/ounce. One reason suggested for the buying came from Reuters, which said "that there is heavy buying in silver in Shanghai, and that has triggered buying in gold as well," said Ronald Leung, chief dealer at Lee Cheong Gold Dealers in Hong Kong.

Also from Reuters: China launches yuan gold fix to boost power in global bullion market
Top consumer China launched a yuan-denominated gold benchmark on Tuesday, as the country took an ambitious step to exert more control over the pricing of the metal and boost its influence in the global bullion market.

The benchmark is a culmination of efforts by China over the last few years to reform its domestic gold market in a bid to gain a bigger say in the bullion industry, long dominated by London where the global spot benchmark price is set.

As the world's top producer, importer and consumer of gold, China has baulked at having to depend on a dollar price in international transactions, and believes its market weight should entitle it to set the price of gold.
China will eventually set the price of gold because it is a physical market and the Comex is almost entirely a paper market. From 2013: Gold: Comex paper vs. Shanghai physical
However, in order to set the global price, gold must flow out as well as in: China's Demand to Buy Gold 'Gets Voice' as Shanghai Fix Starts, Silver Jumps 5%
Despite rising in Yuan terms, the price of that Au(T+D) contract then ended Tuesday trade at a $5 discount to global quotes, as the Chinese price lagged the jump in Dollar prices to buy gold.

"The price is in accordance with China's standard .9999 fine kilobars," explains Jiang Shu, chief analyst for Shandong Gold Financial Holding Co., a subsidiary of the giant state-owned Shandong mining and processing group, "to better reflect market supply and demand in China, rather than the international movement.

"The new benchmark isn't intended to follow price fluctuations in London or New York. The more important issue is China's voice in gold pricing."

"As long as it exists inside a closed monetary system," agrees French investment bank and bullion market maker Societe Generale's analyst Robin Bhar to Bloomberg, the new China Gold Fix "will have limited global repercussions."

China is the world's heaviest importer of gold, but exports of bullion – back onto tradable markets elsewhere – are banned.

"For a truly efficient benchmark," says Bhar, "the market has to be as unimpeded and unfettered as possible."

Bloomberg: Silver Heads for a Bull Market as Prices Rally to 10-Month High
Trading volume for silver in New York was almost triple the average for the time of day. The gains were amplified by big orders that triggered automated short-covering, according to Afshin Nabavi, head of trading and physical sales at MKS (Switzerland) SA

The recent moves in silver and gold miners look extended. I expect the U.S. dollar will rebound and the commodities move will fade. Both gold and silver attract a lot "dumb money" that relies solely on the weak dollar and inflation thesis for buying. These buyers had their clocks cleaned after 2011 and unless the fundamentals shift in their favor, they may get their clocks cleaned again in the short-term, should a U.S. dollar rally lead to mass exodus of the "dumb money." That said, gold has been outperforming the past few years relative to commodities because it is not solely an inflation or weak dollar play, but also money. As the central banks work to destroy fiat currencies and eventually the financial system (and themselves), the value of gold rises. Gold is already in a bull market in some foreign currencies. Unless a major deflationary crash is coming for the global economy, the bottom in gold is likely past. Either way, when the dollar finally enters its next bear market, the true value of gold will be revealed and the 2011 highs left far behind.

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