According to a Reputable German Newspaper, New Gold Rush Lies Ahead

Gold has been one of the poorest performing asset classes in 2013, but according to a reputable German newspaper this is about to end. Unquenchable thirst by China is driving up gold prices, but there is a major caveat.

As mentioned in a prior article, I used my recent visit to Germany to dig for some unique perspectives not commonly dispensed domestically.

Here is one about a new gold rush – and rising gold (NYSEArca: GLD) prices – caused by China.

The Handelsblatt, Germany’s economy and finance newspaper, featured this headline on the August 22 front page: “China Can’t Get Enough Gold” (all the information below is taken from this article).

With 1,054 tons of gold, China (NYSEArca: FXI) sports the fifth largest gold reserve among nations. This sounds like a big number, but China’s gold holdings makes up only 1% of its total assets.

It is unknown how much gold China’s central bank is buying, but it’s certain that the Chinese government wants to beef up its gold stake.

Chinese citizens are also drawn to the shiny metal, as the stock market is considered volatile and citizens are not allowed to invest outside the country.

Does China Plan to Topple the US Dollar?

It is speculated that the communist leadership is pushing for a long-term currency reform as it amasses enough gold to return to some form of gold standard.

Even though China is the world’s biggest gold mining (NYSEArca: GDX) nation (China mined 370 tons of gold last year), according to the Handelsblatt, 798 tons of gold have been shipped from London to China in the last six months.

The metal is melted down in Switzerland and then discreetly moved to China.

According to China’s gold council, China is on track to surpass India as the world’s biggest gold consumer this year.

Higher Prices Due to China’s Thirst for Gold 

According to experts, increased demand will lift prices. The price target of $1,600 by the end of next year was given. The article mentioned that gold is insurance against increasing risks.

Weak hands sold gold earlier this year because of falling prices and strong hands are buying gold, probably for the same reason.

Flawed Reasoning

The above stats are fascinating and the conclusion is logical, but appears to be flawed. Why?

Since the beginning of 2013 gold prices tumbled from 1,700 to 1,179 despite China’s thirst for gold (NYSEArca: IAU). If China has been buying gold like there’s no tomorrow, why did prices decline at all?

Since early 2013, the Profit Radar Report has expected prices to bottom around 1,250. Whether this is a true bottom remains to be seen (we sold our most recent gold position at 1,420).

Despite China’s unquenchable demand for the yellow metal, I believe there are still plenty of risks for gold.

Fortunately, investors don’t have to take any risk right now. Gold – and silver (NYSEArca: SLV) – sport pretty clear support/resistance levels that will reveal a break down or break out. The support/resistance levels are discussed in the most recent Profit Radar Report.

Another trusted German newspaper asks if a financial collapse is near. Read more here: Trusted German Newspaper Asks: “Will the Financial System Collapse?”

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF

By One Measure, Gold Miners (GDX) Are as Cheap as Ever

Gold mining is a labor and capital-intensive business. But there are times when investors can make money even in the gold mining sector. That’s either when gold prices soar or when blood is on the streets. Was the June low ‘bloody’ enough to buy gold mining stocks?

Gold mining is a tough business. It is capital intensive to wrestle the yellow metal from the ground. Once mined, gold – the most valuable asset on the company’s balance sheet – is sold.

Sometimes miners are forced to sell their gold for less than it costs to mine. The miners’ fate often depends on the price of gold.

For the novice investor, the price of gold has become unpredictable. During QE1 and QE2, gold (NYSEArca: IAU) and silver (NYSEArca: SLV) soared because investors were afraid of inflation.

During QE3 and QE4 investors were still afraid of inflation, but gold and silver tanked. Same circumstances, different outcome. Go figure. Instead the S&P 500 (SNP: ^GSPC) soared.

Most of the time the gold mining sector is not the best place if you’re looking for return of capital.

But, if you can catch a major bottom (or a gold bull market), even the gold mining sector can pay off big time.

The Market Vectors Gold Miners ETF (NYSEArca: GDX) is up 36% since its June low. Is the suffering over for the bruised mining sector?

This will largely depend on the price of gold (more below), but first let’s take a look at one unique indicator.

The chart below plots the SPDR Gold Shares (NYSEArca: GLD) against the Market Vectors Gold Miners ETF (GDX) and the GDX:GLD ratio.

The GDX:GLD ratio basically measures the price of gold stocks compared to the price of gold. When the ratio is high, miners are expensive relative to gold. When the ratio is low, miners are cheap relative to gold.

As per this measure, gold miners are cheap now and were ‘major bottom worthy’ cheap a couple of months ago.

If you go back further – until 1996, comparing the Gold Bugs Index (NYSEArca: ^HUI) with the price of gold – you will find a lower ratio in 2001, which was when HUI bottomed.

So this particular indicator suggests that a major low for gold miners is in. But what about gold prices, the lifeblood of every mining operation? The article Is The Gold Rally Real or ‘Fool’s Gold?’ takes a detailed look at gold prices.

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF