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China’s Insatiable Appetite for Gold
Gold bugs and naysayers alike take note. When the world’s second largest and fastest growing economy liberalizes gold ownership by individuals, who happened to be the planet’s most fastidious savers at a 17% rate, you better pay attention.
Among other reforms, the Middle Kingdom is repealing the death penalty for the illegal importation of the yellow metal. The potential demand this will unleash boggles the mind. China historically has been a hard currency culture, and only started using paper banknotes when they were forced upon them as a way to repay debts by foreign colonial powers in the late 19th century.
But the Chinese desire to own gold and silver never went away. In 2009, China imported 73 metric tonnes of the barbaric relic worth $2.6 billion to bring its official holdings to 1,054 metric tonnes. That leaves it far behind the US, which at 8,133 tonnes is the world’s largest gold owner. China’s gold holdings amount to only $37 billion, or only 1.5% of its $2.45 trillion foreign exchange reserves.
To get China’s gold investment up to American levels on a GDP basis, it needs to buy 25 million ounces worth $31 billion. That amounts to 34% of the 2009 global annual production of $110 billion. Being astute traders, the Mandarins at the People’s Bank of China are loathe to chase prices, so don’t expect them to make up the gap in one shot. Instead, expect a quiet diversion of new current account surpluses out of the greenback and into gold.
You can also expect other emerging market central banks to make the same move (click here for my last pieces on this at http://www.madhedgefundtrader.com/february_19__2010.html and http://www.madhedgefundtrader.com/november_10__2009.html ). If non G7 central banks from the current 20% average of reserves to the 35% weighting now owned by the G7, it will require 1.3 billion ounces of new purchases, or 20% of the total world supply. I can hear the “BUY” tickets being written already.
The Chinese aren’t going to provide the next spike in gold prices, but they are building a floor higher than anyone expects. That’s why the last sell off took us down only 8% to $1,158 before a rebound.
This is why gold seems unbreakable. While the rest of the world has been going to hell in a hand basket, gold (GLD), (GDX) refuses to take a serious dip, and is threatening the old $1,260 high. Last week, the World Gold Council, the ultimate go-to source for figures on global supply and demand for the barbaric relic, published its 2010 Q2 assessment. The report paints a positively bullish outlook for the yellow metal (click here for the link at http://www.gold.org/).
Investment demand has been skyrocketing, causing total buying to jump 36% to 1,050 metric tonnes YOY. Purchases from the new exchange traded funds have soared 414% to 291 tonnes. Hoarding of gold bars, primarily in emerging markets, is up 29% to 96 tonnes. India and China will continue to be the new demand driver for the foreseeable future.
A flight to safety bid from Europeans desperate for a hard alternative to the Euro has been strong. A recovering economy has caused industrial electronics gold consumption, especially from Japan, to jump 14% to 107 tonnes, near all time highs. Substantially higher prices caused jewelry demand to fall 5% to 408 tonnes, driven by a pull back in buying from India.
I’m starting to wonder if my long term target of $2,300/ounce is too conservative (click here for “What to do About Gold” at http://www.madhedgefundtrader.com/july-8-2010.html ). Overall, it is one of the most positive reports I can recall. Gold bugs should print it out so they can sleep with it under their pillows at night.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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"The fact is that the spontaneous remonetization of the precious metals is a Nash equilibrium. What this means in English is that an ideal financial strategy for everyone on Earth is to buy as much gold and silver as they can, as soon as possible. To oversimplify wildly, the reason to buy gold and silver is just that everyone else should buy gold and silver, too."
http://www.safehaven.com/article/5205/why-the-global-financial-system-is...
A week or two ago, you asserted that China Mobile (CHL) had a cell phone monopoly (apparently you didn’t know about China Unicom (CHU) and China Telecom (CHA). Now you say that China only started using paper banknotes in the late 19th century, when actually the Southern Song Dynasty (the capital of which was HangZhou) initiated a nationwide paper currency between 1265 & 1274. I agree that buying CHL and gold are attractive purchase options, but you seem pretty casual about the “facts” that you throw into your sales pitch.
To Madhedgefundtrader and everyone else: China was on the silver standard well into the 30's. With England, France, Germany, etc effectively off the gold standard and FDR confiscating the peoples' gold, this was unacceptable to the international banking elite. Therefore, FDR put a bid for silver out on the market at 64 cents an ounce, well above the roughly 40 cent market price, thus driving the price up considerably. The US stockpiled over 40,000 tones of silver and the higher price forced the Chinese to default on their silver certificates and go to fiat. The Chinese government even made it illegal to barter with silver coins! Does anyone think the rulers in China today are unaware of this? Do you think they will get fooled again? Maybe, but their actions suggest they have gained some wisdom.
And good article, thanks for posting.
DOW/S&P500/FTSE/EURO short signal continues :
http://stockmarket618.wordpress.com
I don't make a lot of money but I was wondering on any information on silver in the future.
Silver will explode when its compressed spring is released..Through personal research and data collection I have a target of $50-$60 until everyone realizes that we dont have anymore and we have wasted it all these years..When that sobering fact sinks in Silver will have a Rodium moment....
I was going to mention Rhodium too. All it takes is for some industry to decide they need to stock up before the situation gets out of hand.
Get some silver coins in order to barter them when/if the currency collapses. But first make sure you have 30 days worth of food (dehydrated), medical supplies, water, etc. Necessities will always have value. Bottles of wine, liquor.
Bullets and guns will also be good investments.
PM's should only be purchased after you have used your FRN's to prepare otherwise.
I can silver tracking with Paladium in the next few years before it decides what it wants to do.
Didn't Marco Polo write about using paper currency when visiting China, then under Kublai Khan?
I don't know about Marco Polo, but there was an emporer or series of emporers that created pure fiat and forced the Chinese to use it. Like most paper monies it did not last a long time in the grand scheme of things. By the time the West was doing serious trade with China, they mainly demanded silver in exchange for their goods. When Britian got tired of draining their silver stock in order to acquire silk, tea, spices, etc that is when they began pushing opium on the Chinese as a replacement.
Jim Rikards goes into the history of it here:
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2010/9/7_Jim_Rickards_-_Treasury_Bills__The_New_Opium.html
Yeah, OK, but what about MY insatiable appetite for Gold?
Under $1500 it's a bargain. If Bravo is right, and the price drops to $900 or whatever, then back up the truck. The China/India Put is now in place.
I'm NOT saying "all in" on Gold, as I am only at 6.5% or so in Gold.
JB could only post for a little while; he got called back to his job cleaning the executive wash room at the Treasury Department. His trolling check was cut in half when the latest round of price suppressions didn't seem to work.
I'm NOT saying "all in" on Gold, as I am only at 6.5% or so in Gold.
OK, I'll say it - time to go all in if you haven't already been there.
Yes. We are about 10% in cash. Rest is in PM's and a few spec PM miner plays. The cash position is for immediate liquidity and to take advantage of any "buy the dips" opportunities.
Yea, the gold "bubble" sure isn't much in the US; of all the investors that I know, probably 50 or so, I am the only one who owns any significant gold. Whereas they all still want to buy real estate, except me (and I am tempted!). So where is the bubble?
Whereas they all still want to buy real estate, except me (and I am tempted!). So where is the bubble?
There isn't one. And dont get sucked into real estate. Whatever pops is the last thing to start going up again. loooong time before real estate comes back as an asset class to outperform the majority of other investment choices. Treasuries are building into the next to last bubble. Then it will pile into gold. Then gold will finally, maybe, be in a bubble.
I take that back, the one place that real estate may be ok to go into is apartments as all these people that get foreclosed on have to live somewhere. But as an overall asset class Real Estate is dead. Like horsehead in the bed dead.
Kwik Kamp Bitches!!!!
http://www.kwikkamp.com/outfitter.cfm
Gold is not going to go down in the coming liquidity crisis. There appears to be too much physical demand. People will be selling their UST's and EU bonds to buy gold. Those liquidations will overwhelm the physical market.
Not saying gold to $36k, but I think there is too much pent up demand for it to go to $900. I know I'd be backing up the truck...
Yeah, but can they borrow against it? A key ingredient in balloons bitchez, is easy credit.