The Daily Market Report: Gold Surges to 12-Week Highs

14-May (USAGOLD) — Gold surged above resistance at 1224.23 to establish new 12-week highs. The yellow metals is being supported by a weakening economic outlook for the U.S., which has eroded expectations of a Fed rate hike, and consequently weighed on the dollar.

Initial jobless claims remain pretty low, but the latest PPI print of -0.4% continues to reflect a general weakness in the economy. The annualized pace of producer price inflation fell to -1.3% in April, from -0.8% y/y in March. The inability of the Fed to generate the inflation it desires provides little incentive to raise interest rates.

The World Gold Council released their quarterly report on gold demand late yesterday. The report categorized demand for the yellow metal in Q1 as “broadly stable”. The WGC noted that central banks were net buyers of gold for a 17th consecutive quarter, and are expected to continue accumulating through this year.

The WGC also noted an improved view of gold by Western investors, as evidence by the first quarterly rise in ETF holdings since Q4 2012. I think those investors would be far better served in owning physical rather than an ETF, but it is reflective of perhaps a rising level of concern and expectations of gold price appreciation. And here we are early in Q2 at 12-week highs.

We have reported frequently on the flow of gold in recent years from weak hands in the west to strong hands in the east. Financial attorney Avery Goodman, writing over at Seeking Alpha, presents an interesting explanation as to why China in particular has been so aggressively acquiring gold.

Control over the worldwide currency markets is why China wants to control the gold market. . . If China increases the number of yuan required to buy a troy ounce of gold, for example, the USA must allow the dollar gold price to rise with it. If not, the yuan will fall against the dollar. In other words, China will determine the value of the US dollar on world markets, not the USA. That shifts the power and leverage away from Washington DC and toward Beijing, and will have a dramatic effect on the financial strength of the US government. — Avery Goodman

I don’t think there is any doubt that China is seeking to eventually establish the yuan as a global reserve currency. Having a large amount of gold as a reserve asset advances the yuan toward that goal. Unseating the dollar as the primary reserve asset would unquestionably hasten the ascent of China.