Gold could double if Chinas credit bubble gets messier, Marc Faber says

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With some analysts predicting that the gold price could fall near $1,000 later this year, especially if the Federal Reserve follows through on several interest-rates hikes, HSBC is going against the grain with a modestly bullish forecast.

The safe-haven-inspired demand for gold rests on the interconnection between the state of the gold market and the financial markets of countries, the investment bank said in a recent research note highlighted on Bloomberg TV. Long-term structural arguments for gold accumulation in the emerging markets lead us to reaffirm our 2016 forecast for average prices of $1,205.

Thats not a gangbusters forecast, but its one contingent upon ongoing, steady consumption in the Asian markets, especially China. And so far, thats a no-brainer presumption: The financial crisis erupting there has kept the fires of interest in gold burning in Beijing, Shanghai, Hong Kong, and all points in between.

With Chinese officials devaluing the yuan currency to navigate the tremors occurring in the stock market and the slowdown in the overall economy, gold priced in yuan has responded by moving higher, according to a recent analysis by Zero Hedge. Just look at the chart below:


If China does spring a 15% devaluation on the already-wound-too-tight leveraged speculating community, the impact should be, well, amusing for sure, but otherwise a little hard to predict, Zero Hedge observed. About the only thing that can be said with near-certainty is that the above chart will have to be updated with much higher left and right axes.

Switch to gold gathering pace: Meanwhile, a Jan. 11 Wall Street Journal story confirmed that the turmoil in Chinas financial markets is increasing interest in gold. Chinas stock-market volatility is driving up the price of gold as investors seeking safety pile into the yellow metal, it reported.

A Hong Kong-based banker whose company is a large supplier of bullion to the region said the switch to gold was gathering pace not only in China, but other countries in the region as well, the newspaper added.

In China it was evident already for two years that the economy was slowing down, contrarian economist Marc Faber recently told Bloomberg. We have a colossal credit bubble in China and how it will unwind we dont know. It may happen through significant weakness in the renminbi, although its not sure. It could also happen through significant weakness in the economy. I would rather be overly cautious on China than be overly optimistic.

Buy low, sell high: Where would Faber turn to weather this uncertainty? All the asset markets like the Titanic will crash, he predicted except for gold. I would also own some gold and gold shares. This is the asset class that is very, very depressed, and where I could see a doubling of prices easily, with a limited downside risk.

With gold still a culturally important commodity and a key means of saving in China, where many members of its increasingly wealthy populace have little experience with stock investing, bullions allure is on course to shine brightly as darkness descends on Chinas overleveraged, debt-fueled equities market and the risks of an even harder landing there escalate.