Often there is sound justification for an investment bubble in the beginning that can be identified in hindsight. This doesn't really do us much good. In the case of gold, I believe it is more useful to construct the reasons early, often, and ahead of the herd.
On Monday, Zhu Ning, a professor at the Shanghai Advanced Institute of Finance, offered a sympathetic and detailed defense of the aunties presented in a widely cited blog post:
Why are Chinese aunties so frenzied in their quest for gold? The primary reason is the limited options for domestic investments. The country strictly controls real-estate purchases; money could be saved in the bank but interest rates are low, and taking into account inflation, there are hardly any profits, but mostly losses; it's been only a few years since the stock market slump, with investors losing much of their wealth. So, after gold prices fell, many people thought of gold as a last straw investment and now eagerly anticipate a future rise in value. They only want an investment outlet."
Don't forget what a pensioner in China has lived through. China's older generation experienced 40 years of Chairman Mao. They know just how tough hard times can be in China, a country with very little by way of a welfare state.
Beijing Daily newspaper commented yesterday: "Perhaps the majority of Americans cannot comprehend the unusual feelings Chinese people have toward gold and silver. They've never considered that rather than being afraid to invest in gold, the Chinese are more afraid that they won't possess gold."
Equally important is to look at the purchasing power of gold relative to local currencies in India, China and Turkey. Do you think these people appreciate, like or even love gold? You bet.
Chart Source: Casey Research
The following chart from a Deutsche Bank study illustrates the credit and inflationary threat that is building in China. It's a precursor to a scenario that includes a loss of purchasing power, shown on the chart above. The divergence between hard economic data and the enormous expansion of liquidity since the beginning of the year suggests that credit transmission mechanisms have broken down and the chance of a credit crunch is growing. With the monetary policy practiced today, it means even more currency printing.
In terms of other alternatives, there really isn't much. The story of the $4 trillion in wealth management products in China is rife with scandal and full of misappropriations of funds -- if not outright theft. Chinese investors have already tried stocks, which was largely a scam that brought them big losses. Real estate, which has turned problematic, is yet another scam. Banks pay nominal returns in rate suppression rackets like in the West.
Given that gold and precious metals investment is being promoted and encouraged within China, and banks are being set up to use it under Basel III, logic suggests that gold and silver will be the next China bubble. After all, China has a long history with and affinity for silver and gold.
Interestingly, Google searches in China for the word "silver" spiked at the end of 2012. The high number of searches on Google for the term "gold" suggest the Chinese were already primed to buy even before the April swoon. Unlike India, which had a huge spike and dip, China's interest has been sustainable.
Trends show investors in India love a good sale and provide price support. But the Chinese appear to have a more speculative bent. The next chart, showing the volume on the Shanghai Gold Exchange, is a good proxy for gold demand. Activity is up three to five fold.
Chart Source: WinterActionables.com
China Google Searches For "Silver"
China Google Searches For "Gold"
India Google Searches For "Gold"
The following chart on searches for the term "silver" in the U.S. shows only a modest pickup and is nothing like China's. Americans apparently slept through April's gold event. The data suggests an American would have to be a bit of a contrarian to have an interest in gold and silver. The Japanese actually decreased searches for gold right as their currency was being trashed.
U.S. Google Searches for "Silver"
Until now, China's and India's per-capita consumption of silver have been quite low (see next chart). But that's changing. State-run China Central Television (CCTV) is airing a campaign encouraging the masses to invest in silver and gold for wealth protection. Additionally, Hong Kong-based Chinese Gold and Silver Exchange Society, or CGSE, announced recently it will be launching Yuan-based silver spot trading in Hong Kong. This news is especially significant when you consider the average savings rate in China is over 30% and there is a profound tendency to speculate. Until 1933, China used silver as a currency for thousands of years, and as such is a recognized medium of exchange and has store of value.
If the PBoC gets into aggressive money printing, all will be amplified. This tendency 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 am long PHYS, PSLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.