Gold and silver underpinned by Chinese currency diversification

Gold prices moved higher at the end of last week and pundits expect a sharp rise this week with a jump to a new all-time possible before the end of the year after the sensational news that China is diversifying away from the US dollar.

The announcement from the Chinese central bank was not unexpected. Russia has been diversifying for sometime and the UAE is also looking at buying gold and euros shortly. But the impact of Chinese demand on the gold and silver markets will be profound as these markets are narrow and very demand sensitive.

New all-time highs?

Legendary gold trade Jim Sinclair sees gold now moving above its previous all-time high of $800 before the end of the year compared with the current price of $630 an ounce at the time of writing.

Silver will also gain as the 'poor man's gold' moves in tandem with the yellow metal and tends to be sharply leveraged against the gold price and so could well outperform gold.

Mr. Sinclair forecasts much higher prices for the yellow metal in the years ahead with $1,650 as his target with a warning that this may prove too low. But this is still far out-of-line with mainstream financial analysts, who may well be revising their estimates in the light of the Chinese decision.

However, gold and silver remain volatile markets. Mr. Sinclair warns against margin trading because sudden price shifts can catch even experts unaware. The best approach to gold is to buy and hold using cash and not borrowings, so that if the price moves down you can just wait for it to come back.

Lessons on margin trading

For example, gold peaked at $725 an ounce in May and then dived over $150 before recovering, and now looks like it will reward those with nerves of steel and patience to match. But if you had bought on the margin at the wrong time a fall of this magnitude would have wiped you out.

Perhaps a better form of leverage is to buy gold stocks. Given the fixed cost base of these gold producers any upside in the gold price is translated into proportionately higher profits and so gold shares tend to leverage the gold price. However, they can also become range-bound for periods and again patience is required.

But investors who appreciate an upward trend and have the nerve to stick with it come what may are the ones who score best. And gold and silver investors have just seen an uptrend underwritten by the Chinese Government whatever happens to other asset classes.