Chinese Citizens Significantly Increasing Gold and Silver Ownership

Gold
Gold closed Friday night trading at $1,058.70/oz. In euro and GBP terms gold is trading at €704.55/oz and £642/oz. Gold looks set for its fourth week of gains (if it can remain above $1,053/oz) and this would be bullish technically.

While fears about the Chinese economy may have led to some profit taking in gold yesterday, the news that China is now a net importer of gold and looks set to be a net importer for the foreseeable future is very favourable to gold’s medium and long term fundamentals. China imported 112 metric tonnes of gold in 2008 and the rise in net imports was driven by a significant 176% growth in investment demand for the yellow metal, which hit 68 tons, and 21% growth in jewelry demand to 326 tonnes. With gold ownership banned in mainland China for most of the 20th Century, China is now playing catch up and in time may become as important a driver of demand as India is. Per capita consumption of gold in China is a fraction of that of India but this is set to change in the coming years, especially as the Chinese government is encouraging its citizens to save in gold and silver bullion on state television in order to foster a culture of saving and contain domestic inflation. Chinese savers now have access to gold-linked checking accounts.

Allied to this is the elephant in the room ignored by many analysts - the People’s Bank of China’s massive increase in gold reserves in recent years and their continuing diversification of their over $2 trillion ($2,000,000,0000,000) worth of US debt. Even after nearly doubling their gold reserves to become the world's fifth-biggest holder of the precious metal - from 600 tonnes in 2003 to over 1,054 tonnes today, China still has less than 2% of its currency reserves in gold in marked contrast to most other large industrial nations.

Another material fact ignored by the bears is the not inconsequential matter of central banks internationally set to become net buyers of gold in 2009 for the first time since 1987. Support for gold is currently seen at $1,050/oz and resistance at $1,073/oz. While gold may be overbought in the short term and may retreat and fill the gap at previous resistance at $1,030/oz, the medium and long term fundamentals remain as sound as ever.

Silver
Silver is trading at $17.66/oz. In euro and GBP terms silver is trading at €11.76/oz and £10.72/oz. The gold to silver ratio ($1060/$17.70=59.9) is at 60 and remains very favourable to silver. Smart money continues to diversify into silver with some going overweight due to the favourable gold to silver ratio. In 1980 this ratio reached 15:1 and with a huge amount of silver used up in industrial applications in the last 200 years, it will fall in the long term and may even revert back to 15:1, reflecting the geological gold to silver ratio in the earth’s crust.

Silver’s fundamentals were further enhanced with more news that Indian buyers are switching from gold to much cheaper silver. This is an important development in the silver market (as is increasing Chinese and wider Asia demand) and will likely further aid silver reaching its recent record highs above $21/oz in the coming weeks.

Platinum Group Metals
Platinum is trading at $1,365/oz while rhodium and palladium are trading at $1,750/oz and $323/oz respectively.

Disclosure: no positions

Comments

[justin_3d]

Yeah, this is been known for a couple of months now.

In America we are advertising to sell gold, while in China they are advertising to buy gold.

This is how a market is needed to work!

2009 Oct 23 01:03 PM

[Marco G.]

300 million middle class Chinese, is not a small number to enter the market for precious metals!

2009 Oct 23 08:06 PM

[5142152-337]

The reality of this (particularly pertaining to silver) is that the Chinese BY THEMSELVES can routinely consume a given YEAR's worth of silver production in savings by their "middle class". Don't forget, there are a BILLION Chinese, and a significant number of them are considered middle class.

Start buying those silver bars, rounds and anything with .999 silver. Its gonna be a wild ride VERY SOON. You don't want to be standing there without a ticket to ride, do you?

2009 Oct 24 08:46 AM

[Donald Ingram]

This demand has put in place a solid floor for both metals. Much to the chagrin of the bullion banks that are massively short both metals in an attempt to control higher prices. It won't work. The price pressure from Asia is to great. Remember size counts - the US has 9 cities with a population of 1 million or more. China has 160 cities of this size!
So the puny efforts by the bullion banks are doomed to failure. Get your precious metals while the price is still cheap.

2009 Oct 24 04:17 PM

[doubleguns]

I hope no one expected the Chinese citizens to invest in US dollars.

2009 Oct 25 01:00 AM

[chux08]

While the Chinese government encourages their citizenry to purchase and hold gold and silver, what are the paper-pushing crooks at the FED and the US Treasury recommending??

2009 Oct 26 01:01 PM