Profiting From the Chinese Gold Rush

by: Jim Trippon

China's first gold rush is underway. I mentioned in my article how big the coming stampede is.

If you haven't already read about it then read these bullet points. Changes in China will make 2010 a golden year for investing in gold:

  1. China is actively promoting consumer investment in gold
  2. China will let many more banks import and export gold for consumption
  3. China will also open gold trading to foreign companies in China
  4. China is going shopping globally for "large scale" new gold sources
  5. Beijing is helping to create new consumer products to boost demand
  6. China is stockpiling more gold in its reserves

There are plenty of good reasons why Beijing believes that now is the time for China to go for the gold.

For investors, the important fact is that China will push up global demand. Even though China is the world's largest gold producer it cannot mine enough of its own ore. China had to import 100 tons of bullion a year even before Beijing's latest gold drive. The new demand from China will drive gold prices higher worldwide. The important starting point is gauging just how much demand the Chinese will add to the global market.

Just How Bright Is That Golden Gleam in Chinese Eyes?

We have seen how big the Chinese appetite for gold has grown in the past. China's share of worldwide gold demand jumped to eleven percent last year, up from a mere five percent in 2002.

Chinese gold consumption is likely to double in the next decade. The market now consumes 420 tons. The World Gold Council says Chinese demand will rise to 840 tons as consumer incomes rise.

But it's not just booming incomes that are driving the gold bugs in China. For consumers, gold has always been a highly important, traditional status symbol. But now Beijing wants to drive even more money into gold to prevent investors from pumping their funds into the overheated property sector.

"Investment demand for gold is expanding very fast, we are now in a bull market, and prices will rise in the mid and long-term," a precious metals expert in Guangzhou told Reuters last week.

"China's gold market is going to play an important role in the global gold market," according to the World Gold Council. The gold market usually undergoes an annual average growth rate of just 13 percent in China. But that 13 percent rate of increase is already skyrocketing.

China Golddeal, Inc. declares, "There has been a big jump in interest in gold over the past year." Another busy dealer, China National Gold Group Corp., says sales of gold products such as bars and coins jumped by as much as 40 percent in the past six months.

Even more astounding, the total volume of gold traded on the Shanghai Gold Exchange jumped 59 percent from a year earlier in the first half of the year.

This new gold-rush volume is equivalent to 3,174 metric tons traded annually. But China's gold output will rise by only five percent this year to about 330 tons.

Global gold prices are certain to feel the pressure from new demand. So what options are open to western gold investors?

How to Profit From China's Gold Rush

One of the options is to invest in gold dealers in China. As the middlemen in the booming gold trade, Chinese gold dealers stand to make a profit from retail markups as well as from increases in the value of their inventory.

China Stock Digest: China Stock Market Research & China Stock Analysis

Only a few Chinese gold dealerships are open to western investors. We hold one in the China Stock Digest model portfolio and we encourage you to review the Digest website to find out more.

Investors who want to put their money into physical bullion to take part in the China gold rush have several well-known options through ETFs including GLD, IAU and SGOL. These give the investor a stake in an actual stockpile of bullion gathered by the ETF issuer.

Investing in individual stocks of gold miners is a complex art. Every mine has its own estimated reserves and bullion holdings. Fluctuations can cause share prices to swing. Disruptions of mine operations can hurt shares unpredictably and badly. Major names in this field include Kinross Gold (NYSE:KGC), Barrick (NYSE:ABX) and Newmont (NYSE:NEM).

Gold mining ETFs are one way to manage risk in this field. Market Vectors Gold Miners ETF (NYSEARCA:GDX) tracks the NYSE Gold Miners Index. The fund provides exposure to publicly traded companies worldwide involved in the mining for gold. It holds a blend of small, mid and large cap stocks.

A more dynamic, but also a riskier option, is Market Vectors Junior Gold Miners (NYSEARCA:GDXJ). Because it represents smaller and less developed mines, the Junior ETF will lose value quickly if gold markets are poor, but will tend to rebound very strongly in rising markets.

There are other ETFs that allow investors to short gold or to experience double the gains or losses from fluctuations in gold prices. These are fairly high risk and I'm going not going to recommend them.

However you choose to invest in gold, there are two factors working for you: a strong China, and weak western economies. Gold has gone up over the past year as fears about the recovery of western economies have driven investors to the safe haven of gold.

China has no such weakness. But it is cash rich. This very large market has been given marching orders by Beijing to go forth and buy gold. My bet is they will do just that, and do it in droves.

Gold rushes are a tradition in China. Investors always pile in to buy the thing that is growing the fastest. That's what happened with the stock market, with real estate, and now I believe we will see a stampede for gold that will shake world markets.

Disclosure: No positions