Why China Still Loves Gold, Silver 23 comments
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Back in August, China started publicly endorsing gold and silver as an investment on state sponsored television.
Western financial media, but in particular a lot usually made fun of, the gold bugs, were quick to pick up the story and flood every precious metals section on every financial news website with the news from China. Even I wrote a piece on it. I don't consider myself a gold bug, but having taken a look at the fundamentals of gold and silver, I am as convinced as any gold bug that there is huge upside potential for gold and silver.
Factor in the frantic money printing all over the world and global economic and social instability, a combination which has historically been positive for the price of gold, and you've got yourself a front page news story. But this is not the end of the story.
When I first wrote about the Chinese disclosing their gold purchases back in April, I was pretty sure that any upside potential these purchases might have were long gone. But then, stories about Chinese government officials openly decrying the US dollar started to surface. Officials from other countries followed suit and German Head of State Angel Merkel dismissed Obama's cries to print more money. But the US didn't care; it kept on monetizing debt and buying up toxic assets from insolvent companies. All of this was followed by the TV commercial story.
The TV commercial story, on its surface, is groundbreaking enough to put a smile on every gold bug's face. But beneath the obvious is something much more powerful. From Lawrence Williams at Mineweb.com:
Chinese state endorsement of gold and silver as good investments means the country can no longer afford to let precious metals prices drop by any significant amount.
If this doesn't make you want to run to gold, consider the fact that the Chinese government has to manage its way around 1,338,000,000 people, according to the latest estimates for 2009. Civil unrest has been a problem for years with tens of thousands of protests each year occurring all over China, but it is only going to get worse as factories are being closed for various reasons and environmental degradation takes a toll on the health of citizens; unless the government acts in ways to mitigate those problems.
One has to realize that the only objective of the Communist Party is to stay in power and the only way to do that is to keep the probability of a revolution, peaceful or not, as close to zero as possible. That government cannot afford to lose the trust of its citizens and it has to, and will, do everything in its power to keep that from happening. Keeping its promises and standing by its words (endorsing gold and silver as an investment) is a part of that.
One also has to consider cultural implications:
‘Losing face' is an important aspect of Chinese psychology and if millions of investors lose out because state-promoted investment in precious metals is not borne out this would be a massive government loss of face and one which is certainly not beyond its capabilities of not allowing to happen.
The Chinese have no problems with keeping a floor under the price of gold and silver, especially considering the huge currency reserves that they have accumulated over the years and their diversification plans which involve the central bank of China and an undisclosed number of Chinese sovereign wealth funds buying up domestic as well as international gold. In effect, the Chinese have issued a massive insurance policy on the price of gold and silver.
So there you have it. Considering that China started promoting gold and silver as an investment back in August, one can assume that the current floor is around the price seen in August: 950 in US dollars, 650 in euros, 1130 in Australian dollars, 1030 in Canadian dollars, 570 in pound sterling, 890,000 in Japanese yen. The price of silver was around $14 in August, which means that one ounce of gold bought you 67.85 ounces of silver (use this ratio in case you want to calculate the price of silver in other currencies for the month of August).
Over time, I would expect to see the floor price rise as more and more Chinese accumulate gold and silver at higher price levels.
Disclosure: long gold and silver bullion.
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Gold is China's Central Bank's currency of last resort, just as it is with every other CB (except those who believed their own mantra and relied on currencies). Once spread across the populace it will be used as a transition to whatever emerges as the next stable currency accepted by the world.
Imagine, 1.4billion new goldbugs emerging and add the Vietnamese, other eastern countries and even Europe and India joining the pursuit.
The Long March in gold is truly under way.
The average Chinese already see Gold as a safe place to put their money into. It's not like their government really has to convince them.
If you take the average Chinese (with about $3,000) and ask them what they would invest in to save their money out of these four choices:
A. 200 shares of GE
B. 2 ounces of Gold
C. 5000 shares of the "new" GM
D. 375 shares of MOT
B would be the overwhelming choice. They have trusted Gold for years and do not need a government program to generate interest or trust.
The big "sell" (to change behavior) would be to convince them on the idea of putting their money into stocks on the NYSE. Now THAT would be a much bigger leap in behavior and a harder sell to those who have trusted Gold all their life.
Try:- www.kitco.com/gold_cur...
There have been some very unusual movements [or lack of them] on the daily charts of late. It's often possible to determine where that day's "floor" has been set.
www.kitco.com/charts/p...
Da Boyz sell-off on Friday just before the BLS' jobs announcement certainly woke the dragon - that must've cost 'em.
Is the game-changer the easy access that the Chinese people now have to small-quantity gold and silver through every local bank - that would have an effect even in Western countries. Effectively a gold shop/storage facility in every town.
I'm not sure that the Chinese want the price to rise if they are buying; but their recently admitted purchase programme should mitigate the risk of significant collapse.
The international community says China doesn't have a "safe" currency... so instead they decide to put and promote their citizens excess savings into gold. Over the course of a few years, with Chinese government buying, they create a gold rush. While every other government is short selling gold to keep it down, China government whittles away and scoops it up. As soon as the international community realizes China has all the gold, presto, instant buying panic and the price soars. Meanwhile, all of China's wealthy citizens (which is a small %) that have been buying gold at their government's insistence, become very wealthy. China suddenly has created vast amounts of internal wealth in which to have their citizens buy their own manufactured products. A larger upper and middle class that would promote a healthy economy. Of course this idea assumes that the Chinese are smart enough or big-picture oriented enough to enact this plan. That's a lot of tin foil hat wearing, and I'm not so sure. But it's a thought.
Fun day for gold and silver bulls.
You are right.
I don't think the government ever advised the chambermaids to invest in the Shanghai Exchange (they were certainly allowed to take big losses). But this development is truly something different.
I agree, China hasn't been a massive gold buyer up to this point. But the government now has a new motivation to support the gold market.
Quite insightful. I've seen this story covered many times now, but this is a new angle. Well done!
You said that although you are not a gold bug, you see great upside potential for gold and silver based on the fundamentals. HAHAHAHA! I wish I had a gold nugget for every time I heard someone say "I am not a gold bug, but I think gold will be a great investment."
I am not a gold bug either, I am a silver bug. HAHAHAHA!
Everyone will be gold and silver bugs before the fat lady sings. ONLY GOLD AND SILVER ARE REAL MONEY. They are the only things on earth that have, can, and ever will function as money based on the qualities that define "money" as Aristotle did millenia ago.
To clarify one point:
From what I understand, having looked into this, the gold recently being offered for sale at Chinese banks is on "paper", sort of like GLD, which would mean that there wouldn't necessarily be a huge flow of bullion in response to the current government-sponsored initiative, although of course the banks should be accumulating it on the customers's behalf (presumably via domestic production).
Meanwhile, bullion and coins are available, but through specialized vendors and not through the main banks.
On Oct 05 11:05 PM Slvrizgold wrote:
> Sorry Kristjan, you are not a girl. In America, your name spelled
> that way signifies female and your hair looks long and pulled back.
> I looked and your profile and realize that you living in Estonia
> means you have more sense that most Americans, many who live in a
> false fake media bubble of propaganda and lies. You don't look like
> a girl after I looked at your picture more closely. Your forehead
> is too broad and you have a strong chin. Sorry dude. My monitor
> is small and I didn't look closely. Peace out.
What I've read everywhere else is that the gold being sold is physical, in the form of little wafers and blocks of four sizes. Silver is also sold in that form. (Silver has more of a history in China than gold.) The country that is offering paper gold anew to its citizens is India.
One can definitely pick up physical gold in 20g, 30g, 100g, etc, little mini bars as well as coins. Silver too. All I am saying is that apparently it is different from walking into a branch of Bank of China with currency and walking out with physical metal. As far as I know, you have to go to the designated precious metal/commemorative coin vendor to get physical metals. I am in contact with someone who is in the process of doing this, so I should know more soon, (although miscommunication is always a potential issue).
One thing, the mark-up over spot on retail physical silver was reportedly much higher than on gold which, if true, seems weird. Maybe like you say silver is more popular?
On Oct 06 05:41 AM Roger Knights wrote:
> "the gold recently being offered for sale at Chinese banks is on
> "paper", sort of like GLD"
>
> What I've read everywhere else is that the gold being sold is physical,
> in the form of little wafers and blocks of four sizes. Silver is
> also sold in that form. (Silver has more of a history in China than
> gold.) The country that is offering paper gold anew to its citizens
> is India.
update on the above.
Roger, thanks for your comments, with further probing, my source is now telling me something different, i.e., that one can buy physical gold from bank, that there are 3 banks that do this business (don't know which). One trick is that the mark up (for real gold) at banks is supposedly higher, than at precious metals retail distributors. Also there can be promotions at banks, e.g.: you buy gold, they will charge you right away, but deliver it a month later, but with lower handling fee. And there is "paper gold" and the handling fee is comparitively low.
I was just over there a few weeks back and saw gold and silver commemorative coins and mini bars for sale in the hotel lobby, so even though the mint controls the output, like you say the retail end might be busting out all over.