Reuters has just received data from China that shows that the Chinese have imported 131.9 tonnes of gold from Hong Kong during the month of October - the second highest amount ever imported from Hong Kong. Somebody needs to tell the Chinese that gold is in a bear market and that Goldman Sachs has named it a "slamdunk sell," and they should instead be buying shares of Apple (NASDAQ:AAPL), Tesla (NASDAQ:TSLA), and Twitter (NYSE:TWTR).
The import numbers from Hong Kong so far this year are showing that the Chinese are buying ever more physical gold even as the price declines. The monthly totals of Chinese gold imports from Hong Kong are the following:
Investors should also remember that these are only the imports arriving to China via Hong Kong, and since China does not report its gold import figures, there is a strong possibility that the actual gold imports are much higher. This is showing that even though the paper price of gold may be falling and many Western investors are selling their gold, China is a willing buyer and there is quite a strong bullish market for physical gold in the East.
Additionally, what we're seeing here is a tug-of-war between the paper gold shorts that are driving the price down, and the physical gold buyers primarily in the East that are purchasing gold in ever greater quantities. We're also seeing this evidence in the COMEX where registered gold stocks are hovering at all-time lows, this is despite December being the busiest delivery month for the COMEX - which is when physical gold will be needed.
The million-dollar question is if Chinese demand can continue at these levels without a major outside "fear" event that drives investors into gold. We actually believe it can because of a number of factors including the Chinese government's decision to no longer increase foreign exchange reserves, its desire to increase gold reserves, and perhaps more importantly, the government's attempt to cool down the raging Chinese property market.
Investors need to remember that in China, property is where many people put their money and one of the main reasons of rising real estate prices is because speculators bought property simply to let it sit and appreciate. The government's attempts to cool down the property bubble by raising property taxes and discouraging real estate speculation, we think will result in Chinese investment dollars going elsewhere.
That "elsewhere" we believe will include a significant portion of gold because there aren't a lot of other good quality investments within China (the stock market has been very weak). Investors should remember that it wouldn't take a lot of money going into gold to raise import levels even further, especially if the price drops. We think that if the Chinese government does try to tighten property speculation then the result will be an inflow of Chinese investment into gold - which will give physical gold strong support regardless of Western demand.
Conclusion for Investors
The battle between paper gold shorts and physical gold investors continues as massive amounts of physical gold head east. We believe that there are strong reasons why Chinese demand will not subside anytime soon, and as physical gold is drained from the gold ETFs and the COMEX, there may be a point where physical gold diverges from the paper price as physical stocks become harder to acquire.
NYSE margin debt at all-time highs, we believe that gold is one of the few assets that are significantly underpriced and that we may soon have the low physical inventories drive the gold price higher. Thus investors should consider buying physical gold and the gold ETFs (GLD, PHYS, CEF). For investors looking for higher leverage to the gold price, they may want to consider miners such as Goldcorp (NYSE:GG), Agnico-Eagle (NYSE:AEM), Randgold (NASDAQ:GOLD), or even some of the explorers and silver miners such as First Majestic (NYSE:AG).
Hong Kong data is showing that Eastern demand for gold has not subsided and is actually increasing, and as physical stocks continue to plummet, many investors who joined the gold short trade may soon find out that there is quite a big difference between paper and physical gold.
Disclosure: I am long SGOL, GG, AG, GOLD. 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.