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9 September 2009 86 views No Comment Email This Post

Yesterday, the price of gold hit $1005/oz before retreating to just under the $1000 level. The question is whether gold will stay at this level or drop back down again like it did last year.

There’s a good chance that this time the $1000 level might stick. The difference between last year and now is that China has emerged as a major buyer of gold. Last month, they announced an $80 billion gold purchase (hat tip: LivingOffDividends.com) and very recently the former vice-chairman of the Chinese Communist Party, Cheng Siwei, told us why:

If they [the Fed] keep printing money to buy bonds, it will lead to inflation. After a year or two, the dollar will fall hard. Most of our foreign reserves are in U.S. bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen and other currencies.

“Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the market.”

So you have a high-level Chinese politician admitting that they’re buying gold to diversify out of the dollar and that they’ll be buying on dips so as to not push the price of gold too high! This is significant since it establishes a floor under the gold price. That’s why it’s likely that gold prices will stay around $1000 this year and are more than likely to continue the trend upwards.

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