The Bullish Case for Gold

By Walter Kurtz, Sober Look

DB is maintaining its bullish stance on gold. Here is their reasoning:

1. As discussed earlier (see post), the impact of QE3 on bank reserves has been modest thus far. That may explain in part why gold is lagging previous QE cycles (see discussion). As base money expands, gold prices should be supported (particularly if we see further dollar weakness).

2. US long-term real rates are staying in negative territory (see post). Cash is increasingly expensive to hold, which also provides support to gold prices.

3. DB is also looking at China as the reason for stronger gold prices.

  • China’s demand for gold is expected to outstrip supply.

DB: – China’s Ministry of Industry and Information Technology launched a new guidance regarding the development of the gold industry this week. In contrast to discreet gold reserve purchases, it is worth noting that the central government is now officially emphasizing the property of gold as currency and its irreplaceable role in preserving wealth during financing crises and safeguarding national economic security.

According to the Ministry, China’s gold demand has grown rapidly in recent years, a function of increased need of hedging inflation and financial risks, growing interest in gold reserves by global central banks and rising demand from the private sector. In 2011, China’s jewelry, gold bars, gold coins, industrial and other gold consumption reached 761 tons, the second in the world after India. On the supply side, China’s gold producers faces a number of challenges including scattered resources, low grade, high cost and deep extraction, which will constrain gold production growth. As a result, China’s gold demand will continue to exceed supply over the next few years. The Ministry expects that in 2015 China’s gold demand could exceed 1000t while domestic supply could only reach 450t.

  • Longer term, DB expects the RMB to challenge the US dollar as the world’s reserve currency. To support its currency China will need gold reserves that at least rival that of the US. That means significant new central bank purchases.

US 10y Real Yield (source: DB)


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.
Sober Look

Sober Look

Sober Look was founded by Walter Kurtz, a New York based hedge fund manager and credit markets specialist.

More Posts - Website


  1. i think gold is headed to 1600 $ or less because of technicals. It will be a great buying opportunity. The chinese too are interested in keeping the gold value relatively calm, so buy when gold is low and not when is high. Do the contrary of what technical analysis suggests. Gold is a political market where the stock is what matters and not the flow.

  2. More often then not I find a positive note is actually bearish for gold.

  3. The reserve currency isn’t going to be provided by a corrupt kleptocracy, no matter how much gold they accumulate.

  4. QE3 was announced in mid September and was supposed to consist of about $40B MBS purchases per month.

    As of last week, the MBS component of the Fed’s main account (SOMA), has moved from $847B up to $884B since mid September which is an increase of about $37B. 2.5+ months at $40B per month should be much closer to $100B, especially given that last week actually dropped to $884B from $901B.

    The very slow purchase rate still doesn’t make much sense to me.

  5. bill 12/04/2012 at 12:16 PM
    The reserve currency isn’t going to be provided by a corrupt kleptocracy, no matter how much gold they accumulate.

    Of course it could become a reserve currency, for all the other corrupt kleptocracratic governments that will transfer gold back and forth for trade. Iran and India are a case in point. The world doesn’t revolve around the ideals of the American Way. Ask the guys at JPMorgan or GSachs or the Libor scandal scoundrels.

  6. There is NO chance of Remnibi becoming the reserve currency unless China becomes a NET IMPORTER. They have to actually spend their currency into everyone else bank accounts for them to be a reserve currency. How can a currency be the reserve currency if no one holds it outside of China?

  7. The US was a NET exporter up to 1970 or so but the USD is the reserve currency since 1945. You don’t know history and a lot of other things.

  8. Classic case of bear in gold. It is going down since making a top last year and everybody is screaming.. “look fundamentals are intact and gold must go up” Some are even giving numbers like 2500, 3500, 11000 etc etc..