Last week Alan Greenspan noted that "Rising prices of precious metals and other commodities are an indication of a very early stage of an endeavor to move away from paper currencies.”
In other words, people are buying gold as a hedge against inflation.
Here in China, our firm SinoLatin Capital has been approached by numerous Chinese companies specifically looking to acquire gold mines in Latin America. We've studied the market for some time and we see China making several Latin American gold mining acquisitions over the next few years. How can retail investors benefit from these trends? One interesting way to play the South American gold market is AngloGold Ashanti (NYSE:AU). The South African mining company is moving forward on what they consider to be "one of the most important gold discoveries worldwide in the past decade" in the country of Colombia. The project, known as The Colossus (La Colosa in Spanish), is reputed to contain reserves of over 12 million ounces. The project is facing considerable environmental scrutiny but it looks like it will move forward this year.
But back to China. How could China affect the price of gold? We live in China and spend a lot of time with local industry leaders and policy makers. We hear repeatedly that the time has come to think seriously about how to survive the perceived dollar devaluation. In some cases we note serious concern, and in other cases absolute dread over a perceived dollar crash. Over the past six months Beijing has made a series of moves to protect itself against a dollar devaluation. In a recent "BRIC Summit" in Russia several months ago, Chinese leaders came out strongly in favor of a new reserve currency to replace the dollar (including the IMF's "SDR" currency). China is also quietly purchasing mining assets and gold bullion. But the government has recently gone further. According to Financial Sense:
As recently as 2002, the private ownership of gold was prohibited in China. You could be jailed if caught with any in your possession. Beginning in 2009, in a stunning about-face, the central government removed all restrictions. In fact, as Mineweb and other sources report now it is actively pushing folks to buy some personal metal, with China’s Central Television, the main state-owned television company, running news programs cum infomercials, letting the public know just how easy it is to purchase gold and silver as an investment.
It truly is as simple as can be, because every bank sells gold and silver bullion bars in four different sizes to individuals. (Try to find the same the next time you make the trek down to Wells Fargo.) Mining companies are reportedly encouraging employees to convert some of their wages to gold on payday. Gold is traded in some form 24 hours a day. And paper proxies for the metal are also soaring in popularity. There are persistent rumors that the export of silver has already been banned. Gold could be next.
Thus China, which only yesterday was the lowest per-capita consumer of gold in the world, is bidding to become the biggest. Some analysts believe it will pass India – the top dog since forever – as early as 2010. Clearly, the government believes the country is strengthened if everyone who can holds some hard currency.
All this suggests a mania in the making, and only in the formative stage. Imagine if hundreds of millions of new consumers climb on that particular bandwagon…
Gold is up 27% over the past 12 months and last week it hit the psychologically important US$1,000 mark. Could China propel this further? From our vantage point in Shanghai this is entirely possible.