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Gold Remains Relevant, Jumps on Chinese Rate Cut


Despite record bearishness, precious metal’s strength could be signaling something.

Christopher-LemieuxSMBullion.Directory precious metals analysis 22 November, 2014
By Christopher Lemieux
Senior FX and Commodities Analyst at FX Analytics

Gold and silver have seen their share of bearishness during the last three years of a bull market correction. And, their price action reached levels not seen since the collapse of Lehman Brothers, while it is likely the collapse of commodity prices and the rise of the US dollar, currently, that is leading the way to a deflationary scenario seen in 2009.

Although, it is likely going to become a cocktail of sluggish growth and disinflation that will continue the quantitative easing train. 

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China has now entered the realm of surprise announcements. The People’s Bank of China (PBOC) announced, seemingly out of nowhere, a cut to their key benchmark rate. The one-year lending rate fell from six percent to 5.60 percent, as China faces the slowest expansion of growth in almost 25 years.

The unexpected cut signaled further demand in gold as a hedge against the ongoing destruction by central banking. To think, an official rate of 7.3 percent yearly growth would trigger stimulus from the PBOC, yet the unofficial growth rate is probably a point lower.

The move was unexpected because longtime PBOC governor Zhou Xiaochuan refused to further indulge in quantitative easing, even as governmental pressures and questions about his job security were mounting. The rate cut is seen by most as a public relations move. China’s growth expansion has been facing downward pressure, and market participants demand stimulus. Central bankers have morphed into public relation executives for their respected economies.

There is a fear that a broader-based stimulus program would only continue to fuel China’s growth by the means of an increased debt burden. While China’s debt is not as high as developed nations, it has grown exponentially over the last several years and led to wasteful endeavors. 

The move by the central bank aims to muster lending from banks, while lending remains anemic. Banks fear that lending, specifically to small businesses, is too risky. Even so, demand for loans have been shrinking. Nevertheless, the majority of officials within China believe growth will stifle without an all-out attack on sound monetary policy. It’s done wonders for Japan, right?

The reaction in equities following the PBOC rate cut continues to outline how out of sync the markets really are. Global equities went bid, and headlines of markets being “optimistic” flooded the news wire. It always seems counter-intuitive that jubilee would arise on the news that stimulus is needed because the economy is weak.

The “optimism” must always be priced in, while the not-so-optimistic potential awaits to one, two to market participants like a Floyd Mayweather melee.

In order to find some clarity, one must step outside and ask “what global recovery takes almost a decade of global central banking stimulus?”

Sluggish growth, disinflation or deflation, currency wars, disillusioned labor markets are just some of the keywords since quantitative easing took off; but, there is an argument, a strong one, that even as central banks cut rates to mere bps and trillions of liquidity lay squandered, the global economy – even the less dirty of shirts (the US) – lay lame.

Gold is a clear indicator, in my opinion. Jeff Curry, head of commodities research at Goldman Sachs, had issued a target for gold at just above $1,000 per ounce nearly 16-months ago. Analysts or money managers featured on CNBC’s “gold to $800” articles via Yahoo!

Finance on a near daily basis outline institutional vocal outlook. However, gold still remains a premier financial asset. In today’s rigged precious metals market, gold should have hit that $1,000 mark, and silver should have a single digit in front of the decimal. It has not happened, and the longer central banks carry out with these neo-Keynesian objectives, the less likely this may happen. Even if it does, it will likely just generate more physical demand.

As long as central banks continue quantitative easing, gold has fundamental backing thus underlying support.

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