Is the Gold Bull Back?

Gold is rallying nicely above the $1,271 level I told subscribers to watch.  However, for those gold bulls that are my readers, I have to tell you that this is just the first of some technical hurdles that gold has to push through.

Next comes $1,300, but that's more psychological than anything.  And after that, Gold will need to break through the $1,327 level. IF -- and I say IF -- gold can do that, then we'll be back in a bull market.

Now, here is some of what I am watching on gold ...

1. It's Official -- Chinese Gold Imports Surged in 2013

China's gold consumption jumped 41% in 2013 to exceed 1,000 tonnes for the first time, an industry body said on Monday, as a sharp slide in prices attracted buyers for jewellery and bullion.

The demand surge has helped China become the No. 1 gold consumer and should support prices, which took a hit last year from expectations of a tapering of commodities-friendly economic stimulus by the US Federal Reserve and a drop in demand in the other major buyer India.

Some highlights from the story ...

• Gold consumption in China grew to 1,176.40 tonnes last year, with jewellery demand climbing 43% to 716.50 tonnes and bullion demand soaring 57% to 375.73 tonnes.
• The 28% drop in prices in 2013 attracted a lot of Chinese consumers looking for bargains
• China's 2013 gold imports from Hong Kong more than doubled from the previous year to reach a record 1,158.162 tonnes.
• China's gold output in 2013 rose 6.2% from the previous year to a record high 428.163 tonnes, making the country the world's biggest producer for a seventh straight year. 
• China's gold consumption figures do not include demand from the central bank, whose gold reserves stand at 33.89 million ounces (1,054 tonnes), unchanged since April 2009
• China's foreign exchange reserves, the world's largest, rose to $3.82 trillion at the end of 2013.

2. Shanghai Gold Sales Soar

InGoldWeTrust reports:

In the trading week from January 20 – 24 physical gold withdrawn from the SGE vaults accounted for 57 tons, this is the third week in a row SGE withdrawals have been more than weekly global mine production. In the first 24 days of 2014 withdrawals from the SGE accounted for 216 tons. With one trading week left this month it’s very likely January 2014 will break the all time record of monthly withdrawals, surpassing the 236 tons from April 2013.

Side note: Chinese buying helped stabilize gold prices last year as ETFs sold gold by the boatload. All those boatloads ended up in China.

Assets in bullion-backed ETPs shrank 869.1 tons, or 33%, last year, declining for the first time since the first product was introduced in 2003, data compiled by Bloomberg shows. Holdings totaled 1,737 metric tons on Feb. 7.

Usage by China’s jewelry industry climbed 43%  to 716.5 tons in 2013, according to the association’s data. Consumption of bars rose 57% to 375.7 tons, while coin demand slipped 1% to 25 tons, the data showed. Industrial use was 48.7 tons and other use 10.4 tons, it said. 

Sean's note: With ETF selling winding down, where will the Chinese get their gold supply from now?

3. The US Dollar Is Weak

(Updated chart)

Since gold is priced in U.S. dollars, they usually move in opposite directions.  And for the last week, the dollar has been weaker.

The Dollar Index fell nearly 1% last week on a combination of euro strength and “ho-hum” economic data throughout the week. The euro rallied just over 1% to a two week high, after the ECB again provided no economic stimulus despite the ever increasing threat of deflation. Both the Fed and ECB remain relatively comfortable with current policy.

Looking at the chart, one might expect that the US Dollar Index (as tracked by UUP) would reach the bottom of its range, then head higher.  And that might weigh on gold. However, ranges are made to be broken.  If the dollar breaks down, it's a whole new ballgame.

Dollar bulls can take comfort from the fact that the Euro is on slippery ground.