This is the kind of thing that the Chinese usually keep a secret. No one knows why Beijing broke with tradition. But perhaps the news was too big to contain behind the usual wall of silence.
If you hadn't already heard, China's gold imports are up – way, way up. In the first ten months of the year, China's gold imports jumped fivefold. With two months to go in the year, China had quintupled its intake of gold compared to the full year of 2009.
This is big! Remember, China is already the world's largest producer. Yet its gold imports rose to 209 tonnes in the first ten months – up dramatically from just 45 tonnes the year before.
Clearly Chinese mines are hitting the limits of their ability to satisfy internal demand. And make no mistake, consumer demand is booming.
Not long ago, I mentioned that Beijing was actively encouraging consumers to buy gold as an investment through banks and retail outlets. The plan worked beyond anyone's wildest dreams. Tiny gold ingots, stamped with the image of a rabbit, are suddenly flying off the shelves.
(2011 is the year of the rabbit in China, a year in which some say "money can be made without too much labor.")
Worry about money is partly driving China's gold boom. Inflation has hit 4.4 percent – a level well above the paltry 2.5 percent that banks now pay depositors for savings accounts. The Chinese are famous as the world's greatest savers. But they certainly didn't get that way by looking for ways to lose money.
Adding to the pressure on the gold market is volatility in the stock market. The Shanghai Composite Index has had a roller-coaster year. Instability in stocks has made gold look that much more attractive as an investment.
Shanghai Composite Index, One Year
The Shanghai Index was the worst performer in the world for the first half of the year as liquidity poured into housing investments. Then, as the government began to clamp down severely on property speculation, the stock market took off. But last month, market volatility came back again with a vengeance (despite upbeat economic news).
As all China watchers know, property speculation has been China's obsession for more than a year. Huge amounts of capital have poured into the urban real estate market, driving prices to a level that is widely acknowledged to be a bubble. Once again, gold is being seen as a safe haven.
Beijing has clamped more and more restrictions on property ownership for investment. Capital controls have now made borrowing for speculation a much more difficult prospect. Not surprisingly, the relentless rise in Chinese property prices has begun to ease.
Whether or not the property bubble pops, there's not doubt that a major trend is underway. Gold is now becoming a popular alternative for all income levels. For those who don't purchase gold bars, gold jewelry serves as both an investment and as a prized possession.
Now China is certain to overtake India as the world's largest gold market. Total gold demand in India was 612 tonnes last year.
China's Big Unknown
China's consumer gold market may double in the next decade according to the World Gold Council. The Council expects continuous growth in demand for the precious metal as an investment and for jewelry.
But there's another market that may be set to explode. Beijing's appetite for stockpiles of gold in its national reserves is also growing. The potential is breathtaking.
China holds a towering 2.65 trillion dollars in its reserves. The largest part of that investment is now in dollar-denominated holdings. As we all know the dollar has come under pressure lately. And, other currencies like the euro have not been a safe haven either.
The obvious solution is to move reserves into commodities like gold, and that's exactly what we've been hearing in Beijing lately.
Despite its huge trade surplus, China holds just over a thousand tons of gold in reserve. By comparison, the U.S. holds more than 8,000 tons.
Recently the China Chamber of International Commerce suggested that Beijing's gold reserves are inadequate. They make up just over one percent of total reserves.
How much gold might Beijing buy? The sky is the limit.
This week China's central bank called for a change that would shake up gold markets.
A central bank adviser said China should consider boosting its gold reserves as a long-term strategy to pave the way for the internationalization of the yuan.
The Shanghai Daily carried the following transcript from the central bank's report:
Holding gold as the basis of solvency has been used throughout history to support the rise of a strong global currency. Having a corresponding amount of solvency is a necessary precondition and indispensable safeguard in the long-term strategy for the yuan's internationalization.
Translation: China may need as much gold or more than the U.S. in reserve. That would mean purchases of thousands of tons of gold to support the yuan's status as a reserve currency.
Combine this with China's ravenous appetite for gold as a retail investment and you have the makings of a major trend.
With China's gold production topping out, and western reserves still under development, gold prices could still have a lot of previously unexpected upside.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
