Guest Post: Chinese Gold Fever

Tyler Durden's picture

Earlier Lear Capital presented their view on what the basis for Chinese gold accumulation may be. Next we present a comparable analysis by which takes a deeper dive into the demand mechanics originating in China. To wit: "In some parts of Asia, inflation is rampant. Especially in India, food prices and other staples are going through the roof. The prices of some vegetables and spices has risen more than 100%... In China, the prime goal of the communist party is to maintain social stability and to avoid unrest. Targeting inflation is key. Therefore, many Asians are investing their hard-earned money into precious metals. The latest news from China corroborates this: in the first two months of 2011, the Chinese have imported 200 tonnes of gold, which is as much as in the entire year 2010! This is just individual investor demand, we are not even speaking about central bank demand, accounting for the entire Chinese mainland gold production! Chinese gold fever has caused gold demand to triple in the past 10 years, according to the World Gold Council. The Chinese are about to overtake the Indians as the world’s biggest gold consumers." For short-term market timers, as we predicted a week ago, continued pressure on risk assets, such as that today, will most certainly result in forced liquidation in precious metals such as gold and silver. This is absolutely guaranteed as margin calls pile in, and hedge funds, already levered to the hilt have no choice but to sell all outperforming assets, among which gold is at the top. Once liquidations are completed, the question will then be: does the Fed resume its inflationary path (and as a just completed analysis by Zero Hedge confirms, the shadow banking system is once again declining leaving few options for Bernanke). If that is the case, then the long-term fundamentals from a speculative standpoint revert. Add to that the discussed organic demand, and increasingly loud calls for $2,000 gold may materialize sooner rather than later.

Submitted by Smart Money

Chinese Gold Fever

Investors are increasingly worried about rampant inflation, and they should. In the author’s home country, Belgium, the price of fuel just hit a new record. Other necessities are becoming more expensive, too. The price of many commodities is close to an all-time high, which does not bode well for the pricing power of many corporations, which are set to see input prices rise significantly. This will put severe downward pressure on valuations, hence stock prices. As a matter of fact, as the markets are trading at a price earnings ratio of 16 on average, the cyclically adjusted PE ratio (CAPE) is closer to 23, which is quite expensive! The CAPE is the Shiller PE, which flattens out the business cycle on a 10 year period, which gives a better idea of stock market valuations. Markets are far from cheap, despite what many mainstream media would like us to believe!

Savvy investors however, know better. They are sensing we might be hitting a market top in equities. With oil prices north of 100 USD per barrel, sensible investors are looking for ways to shield their wealth from a potential market correction, shifting their assets into tangible goods. It goes without saying that gold is the most obvious beneficiary of this secular move. Investor demand is high, and the yellow metal is hitting new highs almost every day.

It should thus not come as a surprise that demand is driven mostly by emerging markets. In some parts of Asia, inflation is rampant. Especially in India, food prices and other staples are going through the roof. The prices of some vegetables and spices has risen more than 100%. Due to the inefficient infrastructure and logistics in India, food cannot be transported easily and perishes on its way to the other side of this huge country. In China, the prime goal of the communist party is to maintain social stability and to avoid unrest. Targeting inflation is key. Therefore, many Asians are investing their hard-earned money into precious metals. The latest news from China corroborates this: in the first two months of 2011, the Chinese have imported 200 tonnes of gold, which is as much as in the entire year 2010! This is just individual investor demand, we are not even speaking about central bank demand, accounting for the entire Chinese mainland gold production! Chinese gold fever has caused gold demand to triple in the past 10 years, according to the World Gold Council. The Chinese are about to overtake the Indians as the world’s biggest gold consumers.

These figures show that daily demand for gold in China outstrips current demand to a large extent, pushing up prices incessantly.

And still, we are a long way from a gold hype. Mainstream media are still not touting gold as a sensible investment, retail demand, despite an increased interest, is not extraordinary and there is still quite a lot of room for central banks, especially those in emerging markets, to increase their gold holdings and diversify into the yellow metal, to the detriment of the US dollar and other fiat currencies. As the graph above shows, the USD gold prices is rising slowly but steadily, without overshooting on the upside. It clearly exhibits that we are in the second phase of the secular bull market in gold, namely the institutional phase. We are a long way from a top in gold. Before the masses wake up to this, the gold prices will have surged to levels that are unfathomable today.

We expect the gold price to hit 1600 USD per troy ounce by the end of 2011, which is in the cards if the trend continues. It will not be a smooth ride however, as we expect volatility to rise this year. Gold is traditionally weak in summertime and is likely to correct by early August, but these are excellent buying opportunities.

We continue to favour a balanced mix of physical gold (bullion bars, coins) and a quality selection of junior and mid-tier gold stocks. This ensures a healthy mix between capital preservation and leverage to the gold price!

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Judge Judy Scheinlok's picture

"In some parts of Asia, inflation is rampant. Especially in India, food prices and other staples are going through the roof."


septicshock's picture

You stupid cunt! Those are people starving because we export our inflation. You need a foot up your ass, but then again... You probably like that.

sun tzu's picture

Nobody forced them to link their currency to ours. They do it in order to lure American jobs to India. This is the price they pay. Stop being such a dummy all the time. Blame the Indian politicians and elites.

ChookChoker's picture

I love the contrasting insults! Both ends of the spectrum on display here. Funny thing is both opinions have a factual basis.

AldoHux_IV's picture

They both don't get it really.  Inflation brought upon central bank cooperation is not a good thing as it represents the power a few people have over many and the reason for so much meaningless suffering in the world.  Inflation is a tool and used by the central banking cabal-- it is not specific to one or the other as all central banks trade currencies with one another.  Thus, what's going on is a form of manipulation to serve the central banking master's needs: economies of scale (i.e. cheaper labor) and finding new consumers to buy their products.  The process in which they do this only results in the few having the only access to opportunity and the many left with little or no means which is why you see the unrest around the world and rightfully so.

Non Passaran's picture

So it is the trade deficit and not budget deficit that's making the Fed print and causing inflation?
If the US had balanced external trade, the Fed wouldn't have to print?

DrStrangelove's picture

Your pony is slow.  From March 6th.

Gold imports in China rose 500% from 2009 - 2010 to over 200 tonnes. China also mined over 340 tonnes of gold in 2010. In January and February of this year China had already imported 200 tonnes of gold. This should come as no surprise and we should realize they are just getting started with their gold buying program. China one of the lowest percentages of gold relative to the nation's foreign reserves, they must continue to import gold if they are to achieve stability and or any sort of dominance in the new monetary system that is yet to be upon us. China does not currently allow gold to be legally exported from their soil. The Chinese government has consolidated the gold mining industry this decade and the number of gold producers fell from 1200 to 700 in this time period. China relies on a handful of producers for nearly half or their production supply.

India's gold demand increased 66% from 2009-2010 to 963 tonnes. India's demand for gold currently rivals China and the USA combined. India's citizens are known for saving in gold and silver and giving large amounts of gold during the wedding season which begins in February. As a percentage of gross household savings Indians are saving much more gold.

jeff montanye's picture

the low percentage of chinese household savings that is in gold seems striking.  such a lot of potential demand there.  wonder what the figure for the u.s. is?  oh that's right, the u.s. doesn't save anything (except the too big to fail).

DrStrangelove's picture

The India vs. China gold savings rate chart is very telling.  In India gold is over 10% gross household savings.

Judge Judy Scheinlok's picture

Isn't average gross income like $10 Rupees a month?

william the bastard's picture

You're not smart enough to know? :

Non Passaran's picture

Chuckle :-)
I thought the same just a second before I saw your comment.

(But at least I learned something - before I didn't know the currency symbol for INR is $.)

jeff montanye's picture

not sure the currency the judge is using but per capita income for india is about $275 per month and it has doubled in less than ten years.  p.s. the symbol for rupee is Rs and the equivalent is about Rs 3700 per month.

SilverRhino's picture

And silver will ride that rising gold tide nicely.  

DosZap's picture


Yes TD likely left that out as it was a GOLD thread.

Silver is being INHALED by the Chinese as well,not many Chinese can afford Gold,when looking at the 1.5b + population.

But they will and can buy Silver, and are doing so at at least the rate of Gold.

Non Passaran's picture

It's 1.3+ billion, actually.

DoctoRx's picture

Am skeptical there's a lot of highly leveraged gold owners out there.  If I'm in a BRIC, or in the Anglosphere, and I've got some saveable funds, I will want PM.  I will not want USD, or certainly not an overweighting in USD.  So I will BTFD.  It is the USD, with short term money rates at 1000X earnings, that is in a bubble.  Not Au.  No sense timing entry to Au if not yet in enough.  One bad hair day in the Mideast, or with an unknown unknown etc., and we can see a 5% move overnight.  And there will be few sellers if that happens, whereas it will take quite a lot of TPTB effort to persuade dip buyers not to BTFD on a big down-move.

nope-1004's picture

Banged  your head 5 too many times.


Long-John-Silver's picture

I only posted once and it came back with a error. Then I come back and discover it's puked all over.

william the bastard's picture

You'll be pukin PMs by Monday PM. You know how to bend over. I can tell ya do.

DosZap's picture

Sorry about that stutter.........since birth(;

DavidPierre's picture

A Pause?

There are no safe havens in the world today, as all the markets are down, oil, base metals, gold and silver are all getting pounded. The one exception is the dollar...dead cat bounce.

It is very rare to have all markets and sectors trading in sync like this, and the question then is which sector will begin to show positive divergence from this trend first?

Assume that most of the downside volatility today is a result of spec traders pulling in leverage, unwinding longs after a strong run. There is nothing fundamentally different about the set up for oil, or the metals today that was not priced in yesterday.

Similarly the dollar is enjoying a rally as shorts take profits and close positions. 

Is this a sign the market has priced in some measure of security?

Recall that during the unrest of the last few weeks the dollar was mostly lower and did not appear to represent any haven.

Gold and silver have posted some huge gains during the last few weeks and were into overbought territory. A correction is both necessary and healthy, and no doubt has been helped along by some ambitious shorting by the Cartel in the early going today. The downdraft in the metals will draw in even more buying in the days ahead.

How long can the PM shorts go before they act to cover some of their outstanding position?

With the physical market so tight it will not take much to recover the losses very quickly. This week may be seen in hindsight as the pause, a cooling off in the sector ... allowing some consolidation before the next move.

Buy your favorite juniors. Some stocks have dropped more than 20% in just a couple of days. Perfect!

The options and warrants have been hit even harder. Bids that were  far below market were filled easily today.  Never discount the possibility that further downside may come... set new bids even further below the current market prices just in case. There are still some big up gaps that may be filled to the downside before things settle down. But the longer term direction for all commodities remains up and the stocks will follow.

There has been some new money moving into the sector this year. People who have not seen this sort of thing before are probably shell-shocked and selling into this blitz. But there are many sector veterans that are happily buying in this action.  The transfer of PM shares into stronger hands will set the foundation for the next big rally. It may come sooner than many expect.

We will have to put up with some backslapping by the top callers after today... giddiness on financial networks today after reporting the downside in precious metals. They pull up a chart for silver and then note the heavy buying lately, then point out the loss today, and commented 'contrarian dream' or some such nonsense.

But put all this in perspective: even this nasty down move has washed just a buck and change per ounce off the record highs for silver. A move of maybe 3%?

And in gold the damage has been maybe $40 off the highs, also about 3% to the downside. Is this a big deal?

The top callers were putting out their spin below $30 and now some take credit for getting it right? And talking heads chuckle that the metals are lower even as the DOW was down by nearly 200 points today. Gold and Silver are far from a top.

People were making scary predictions for doom back in January too and the metals exploded higher leaving many in the dust. Even the epic meltdown in 2008 was recovered in less than a year for gold and two years for silver.

There is far too much angst generated over the downside in this market and far too little interest in holding on for what could be the biggest gains yet in the years ahead.

Buckle up and ride out the inevitable volatility along the way and try to buy dips when the opportunity comes along.

Why care about a short term downside of a few bucks when the potential for several hundred percent gains remain realistic and achievable?

Let the bears have their day and the top callers can pound their chests and claim a temporary victory. This entire move will be a tiny blip in the long term chart that no one will remember in a short time.

The Cartel will push even harder for a washout ...the metals will recover.

Trying to predict what happens in the next few days is not important. Be happy for an opportunity to buy quality companies on a dip, and build leverage for the next uptrend that will happen. The rest is just noise.

Lord Koos's picture

Stocks are going down on their own, but the fact that metals are also going down points to the manipulation.  Overbought?  They are just getting started.

Snidley Whipsnae's picture

The fundamental fact is that the Fed and other central banks have not stopped printing fiat to the moon. The Euro Zone has at minimum four countries that are near soverign default.

Until the excessive fiat printing stops PMs will not stop their secular trend upwards...and paper gold is not gold and not a safe haven, but a manipulative device that can be and is being used by the CBs to hold PM prices in check.

Of course the CBs are going to pull out every trick in their bag to derail PM priced in fiat and they will cause some scary dips. Leveraged PM buyers will be shaken out...BTFDs... PMs are the only place to stand that is safe from the economic train wreck that is in progress.


boeing747's picture

Old news ZH, Chinese national banks can import Gold by themself for future trade purposes. Chinese bought silver by kilo, I told you before. FYI, now they also buy stamps, jades, and precious stones/engraving stones(some valued 100 times over Gold).

Another FYI:

"Utah took its first step Friday toward bringing back the gold standard when the state House passed a bill that would recognize gold and silver coins issued by the federal government as legal currency. The House voted 47-26 in favor of the legislation".

DavidPierre's picture

Sen. Bill Ketron wants TN to consider creating its own currency.

Ketron has filed a joint resolution to create a committee that would study whether Tennessee should adopt a currency as an alternative to the federal dollar in the event of a "major breakdown" of the Federal Reserve. The proposal is part of a burgeoning movement on the part of conservative lawmakers to begin preparing for a worst-case scenario in which the Reserve collapses. Ketron's legislation mirrors almost word-for-word bills filed in South Carolina and Virginia, which passed the law earlier this year.


mynhair's picture

Meethinks NFLX shorts also hold paper gold and silver.

Want to say 'stupid does as stupid is' cuz I can't for the life of me can't understand why anyone would willingly expose themselves to a forced buy-in on a POS like NFLX.

penisouraus erecti's picture

I'm rarely confused with Einstein, but does this article indicate the Chinese are smart enough to be purchasing physical gold? That would be a good move, no?

gwar5's picture

Exactly. China relaxed laws for owning gold and silver and told their people to go for it.

Papasmurf's picture

That's one means of controlling internal inflation.  When cash chases gold, it's not chasing goods. 

mt paul's picture

gold covered 

plastic rice...

penisouraus erecti's picture

So, since this article is on the heels of the Lear article, if the USD were to no longer be the world reserve currency, how fucked would we be here in the US (aside from the criminal bankster element that will no doubt survive quite nicely)?

william the bastard's picture

When all else fails, flail away w htf the wild card will bail ya out. Sign of a guy trapped in a bad trade.


web bot's picture

The basic arguments being put forth by the economists is that we don't have inflation because: 1. we have excess capacity, hence no demand pressures to push up prices, and 2. we are not seeing a rise in wages... which has is considered the trip switch by central bankers to signal inflation.

What these fine people never get around to addressing is if you are having food and energy inflation and wages are not rising... one of 2 things happen. People either stop eating... or, you know the other.


When you get guys like Nenner saying that a war is the only outcome for the US to extricate itself from this mess... you know things are not well.

gwar5's picture

China gold demand stabilizes and strengthens their economy while weakening Western fiats. It's a three-for, and very shrewd move.

If China does not acquire enough gold to compete as a reserve currency they still strenghten their percentage strength as a player in any IMF SDR basket of a WRC proxy. They could also partner with Russia to obtain analternate currency hegemony. The USA is not only losing this game, we don't even appear to be playing the same game. We're playing checkers while the Chinese play chess.

Moreover, Alisdair Macleod claims China may actually have more gold than the USA because they've hoarded it for centuries and we don't really know how much they have.

Arab countries prefer gold over FRNs. Sharia complaint banking favors gold backed transactions because usury is banned. China will be increasing their oil demand for decades and having gold is a good thing for them going forward. 

tony bonn's picture

he who owns the gold makes the rules....tungsten don't count bitch.

Trimmed Hedge's picture

"Chinese gold"?

Is that the low-quality stuff that breaks after just a few uses?


dumpster's picture

clue less in america.


china will be the first with a gold backed currency

the euro will follow

gold will be purchased by nations states , large hedge funds retirement money , at 1500 at 2250 and higher

those who think gold has no place in international trade are walking dead midgets

it is coming closer than many know . and think ... clarify most do not think lol

so stand by get loaded up with paper , and watch a life time of work go down the drain.

or listen to the sound of the hollow men ,, we are the hollow men  brains made of straw


Math Man's picture

Interestingly enough, the 200 tons of Gold imported in the first 2 months accounts for $9 billion of China's $7.3 billion dollar trade deficit...  hmmmm.

dkz's picture

zerohedge is to gold/silver as cnbc is to stocks.


rich_wicks's picture

I'd agree if CNBC actually gave good advice about buying stocks, but it doesn't.

You do what you like - nobody cares if you think the US currency has some sort of actual value.  Bernanke is telling you exactly what he's doing, and then lying through his teeth about what the result of his actions are.

Dollars are a commodity, and creating a lot of them, will make them less valuable.  He's increasing supply.  A child can see it will devalue the dollar, and if you don't realize that, well, a fool and his money deserve to be parted.

AldoHux_IV's picture

Inflation targeting = social class genocide.  The more you target inflation which its effects are very relative in nature, the more you harm one class of people versus another.  Inflation targeting is just elitist jargon for economic genocide.

Snidley Whipsnae's picture

"Inflation targeting = social class genocide"

Yes, but it's worse than that. Inflation targeting sends a message that saving is a losing proposition and savings are the excess earnings that make borrowing for economic expansion least, in a real capatialistic economy.

What we have now is a command economy solely directed by the Fed and other central banks.

Only a free market can determine what interest rates and inflation/deflation should be. Until we have a free market again physical PMs are the only investments that cannot be jerked out from under one. Who wants counter party risk when the counter parties are the central banks and Fed?