Gold has recently topped the $1,200 per ounce mark, but analyst David Rosenberg sees it going as high as $2,623 per ounce in the not-to-distant future if Communist China follows through on its plans to begin stockpiling the precious metal.

The Business Insider reported this bold prediction on December 1, referring to Gluskin Sheff’s analyst newsletter Breakfast With Dave. In this newsletter, Rosenberg noted that gold “just capped off its best month in a year — up 14% in November and 34% so far in 2009.” The S&P 500 couldn’t compete with that kind of growth. Driving these gains is “news out of the China Gold Association that the country’s gold demand is on pace this year to exceed 450 metric tonnes, a 14% increase over the 395.6 tonnes in 2008.”

China, “which recently surpassed South Africa as the world’s largest producer, is on its way to 310 tons of newly mined output this year, or more than 30% below its level of demand.” But China’s appetite for gold is growing. Rosenberg mentioned that jewelry sales are up double-digits in China this year, and China’s central bank is showing signs that it is about to significantly increase its reserves.

Rosenberg referred to a Bloomberg News article quoting Ji Xiaonan, the chief official at China’s state-owned central bank known as the Assets Supervision and Administration Commission, as declaring “we recommend China increase its gold reserves to 6,000 metric tons within three-to-five years and possibly to 10,000 tons in eight to 10 years.” China’s reserves now equal 1,054 tons, already reflecting a “76% buildup since 2003,” but a further increase of six to 10 times the current amount would represent “some pretty heaving buying in coming years.”

Rosenberg predicted that if China were to achieve a gold reserve of “5,000 tonnes, which is equivalent to about two years of global production, that shift in demand would boost the gold price by $800/oz to around $2,000 ($1,978).” He then also speculated: “If China moves towards 10,000 tonnes, well, that would end up taking the gold price to $2,623/ounce if our calculations are in the ball-park.”

“Make no mistake, we are gold bulls,” Rosenberg declared. “Central banks have deep pockets and production of gold is stagnant so the demand-supply backdrop for bullion is bullish.” He pointed out though that the market for precious metals is overextended, saying, “The net speculative long position has swelled to a record 273,552 contracts (100 ounces each) on the COMEX. Open interest has never been higher, at 693,661 contracts. So this is one crowded trade — as is the short-trade on the USD against all the major currencies, especially the commodity-based units.”

He left the door open for “a meaningful gold correction” to occur “at any time,” but still sees the correction as occurring in the midst of a bull market. Rosenberg noted “we could get as much as a 20% pullback and no fundamental trendline would be violated.”

In conclusion, Rosenberg said: “We remain long-term gold bulls, and our commentary remains fundamentally bullish, but anything that could spark a countertrend rally in the U.S. dollar, which is our principal near-term concern, would put gold at a much better price point for investors than the peak we are at today.”

So Rosenberg leaves some room for hope, though the U.S. federal government’s policy of financing deficit spending through massive foreign debt pretty much puts the dollar at the mercy of countries like China. If China decides, unsurprisingly, that gold is a better investment than U.S. Treasury securities, the dollar will suffer.

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Bonnie said:

Diversionary tactic This is a nice attempt by David Rosenberg to create an enemy we can blame for all our economic woes (China) while diverting attention away from the REAL enemy responsible for the collapsing dollar and subsequent increase in the price of gold. Note that I said "price" and not "value". The value of gold remains relatively stable. Not so with the dollar. In respect to the value of gold, the dollar has fallen about 98.3% since 1933. So who is the REAL enemy? The cabal of a few behind the scenes international bankers and their puppet, the Federal Reserve System.

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December 05, 2009
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ed walsh said:

president It seems to me that the issue really is that there is a limited amount of gold available. If China becomes an agressive buyer or for that matter if more central banks decide to divert their reserves for something tangible that will always have value then look-out for huge price appreciation for gold going forward. Fiat paper is basically valueless without confidence in the underlying paper IOU. LOL Looking after your money.

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December 06, 2009
Votes: +5

Bonnie said:

It's all a con game The price appreciation ed walsh speaks of is the result of the reserves! Here is how it works: The government wants some money, so they take a blank piece of paper, add ink, and call it a Treasury note or bond. It is taken to the Federal Reserve where it is called a "securities asset". This is counterbalanced by a liability created by adding ink to a blank piece of paper and giving it back to the government. It is called a "Federal Reserve check". The government deposits this check and it now called a "government deposit". The government then writes "government checks" on this deposit. Recipients deposit these government checks and they become "commercial bank deposits". The bank calls them "bank reserves". Thanks to the miracle of fractional reserve banking, 90% of these bank reserves become "excess reserves". Excess reserves can be used to make loans, which are deposited, creating more bank reserves and more excess reserves, and more loans, and the cycle repeats. Up to 9x the amount of the original Federal Reserve check can be created. It is with all these reserves that gold is purchased. But the more gold you want to purchase, the more reserves you need, and the more reserves you create, the less perceived value there is in the reserves, thus the increase in price. The crazy thing is that the gold is being taken, but nothing of value is given in return!

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December 06, 2009
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ed walsh said:

President Bonnie, I don't necessarily disagree with your economics 101 analysis concerning fiat currency. However here you have the number of paper IOU's increasing in various forms when the velocity(multiplier effect)is practically frozen as far as the masses are concerned. At the same time we are experiencing exponential debt where the debtor country has an inability to pay within a reasonable period of time based upon normal interest charges. Gold has real value versus paper currencies that represent IOU's under circumstances where the confidence of the holder of the IOU is eroding. Gold goes up when the basic confidence level in a fiat currency drops. Witness the classic relationship between the US dollar's value and gold's value. These values are real. There are several reasons for the appreciation in the value of gold. May I refer you to Turk&Rubino "The Comming Collapse of the Dollar" LOL Looking after your money.

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December 07, 2009
Votes: +1

Bonnie said:

ed walsh The number of IOU's is indeed increasing. Fractional reserve banking has been around for a long time and currently is a function of the Federal Reserve. This is the multiplier on the IOU's and drives inflation (defined as an increase in the money supply). As China (among others) trade debt for gold, the impact of this inflation grows for the consumer (in the form of price increases). This in turn impacts the dollar price for gold. Gold is limited, and as it is hoarded (as China is doing) the real value will indeed increase. I don't disagree with you. All I am saying is that the focus should NOT be on China. What China is doing is indeed not a thing to be desired, but their ability to buy gold with fiat dollars would be impossible if not facilitated by the Fed and its owners. If a vicious dog is allowed to run loose and that dog bites you, do you blame the dog or do you blame the owner?

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December 07, 2009
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