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Monday, September 15, 2014

Gold: Soros and China go bottom fishing.

Two Reasons Why Gold May Have Bottomed
Has gold finally reached the bottom and is it ready to start going back up?

 As of June 30, legendary investor George Soros had nearly doubled his ownership from the previous quarter in the Market Vectors Gold Miners ETF to 2.05 million shares. And, while he did sell the majority of his holdings in one gold-mining company during this same period, he also initiated new stakes in other gold producers.2 Since gold miners tend to follow the price of gold, this new overall investment position may suggest Soros believes the price of gold has bottomed.

There are a couple of factors that indicate he may be right. First, gold has been relatively stable, despite the recent dollar strength. Second, it seems the metal has found a price floor around $1,200 oz. So, let's take a closer look at these two factors.

Is China Setting a Price Floor for Gold?

Last year, when gold plunged 26%, a lot of investors in the U.S. sold their gold positions. But, Chinese consumers, viewing the price weakness as a great buying opportunity, went into a buying frenzy. Last year, mainland consumption was a record 1,065 tons, or about 28% of global usage. With such a strong demand, China overtook India as the world's largest user of gold.

The China Gold Association recently forecasted that the global flow of bullion from West to East that helped make China the world's largest user would probably last for up to two decades. And, according to a recent report from the World Gold Council, gold demand in China will rise about 25% in the next four years as an increasing population gets wealthier.
After the publication of that report, Albert Cheng, Far East Managing Director at the World Gold Council, released the following statement: “While China faces important challenges as it seeks to sustain economic growth and liberalize its financial system, growth in personal incomes and the public's pool of savings should support a medium-term increase in the demand for gold, in both jewelry and investment.”4

In fact, the Chinese have shown a very strong cultural affinity for gold in recent years. When you add that to an increasingly affluent population, the result should be a very strong demand going forward.

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