Looking For The Next China Bubble: Gold And Silver

Includes: GLD, SLV
by: Russ Winter

The $4 trillion wealth management products (WMP) story in China is getting both very nasty and is being kept under wraps. The government there is going so far as to censor news coverage. However, there is also a decent chance that investors in these products will be bailed out, setting the stage for more even moral hazard (see WMP, Too Big to Fail?). And since moral hazard and speculation rules, one wonders what play toy the Chinese will turn to next. They tried stocks which was largely a scam, real estate which turned problematic, and WMPs another scam. Given that gold and precious metals are literally being promoted and encouraged within China, and the banks are being set up to use it under Basel III, logic could very well suggest that gold and silver will be the next bubble in China. China has a long history with silver.

I also wonder about silver investment demand in China and India or even other areas of the world like Africa or Latin America. With the developed countries engaged in currency destruction and gimmicky hubris, even gente in emerging countries might turn to a store of money, or a "poor man's" gold. So far silver per capita consumption in China and India are quite low (see chart). But that is changing. This WSJ article describes increased interest in trading silver in China and India. But other stories point to good demand for gold in India and little for silver.

State-run China Central Television (CCTV) is running a campaign encouraging the population to invest in silver and gold for wealth protection. In addition the Hong Kong based Chinese Gold and Silver Exchange Society, or CGSE, announced recently that it will launch Yuan-based silver spot trading in Hong Kong early in 2013. This is especially significant when you consider the average savings rate in China is over 30%. The key is that Chinese (and Indians) are hoarders and will take down physical gold and silver.

More importantly, I think China's accelerated objective is to make its currency the new reserve for the world, so it can diversify out of the consistently declining U.S. dollar. China's Premier called the USD as a world reserve currency "a product of the past," so its goal has been made clear to anyone listening. To make the Chinese currency different from all other fiat currencies in the world -- and to give major trading partners more confidence in it -- it will be backed by a reserve of gold and silver. China has used silver as a currency for thousands of years except since 1933, so it is used to it as a medium of exchange and store of value.

If the PBoC gets into aggressive money printing, all will be amplified. This tendency is what will expose the inventory short and manipulated paper markets. Therefore, I now see silver as potentially acting like gold on steroids as the western system comes unraveled.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.