The Chinese have an inflation problem because of their dollar peg.
Keeping the peg leads to printing of Yuan, but the Yuan stays in the country - the Chinese can't invest anywhere else. They have no choice but to buy hard assets -- real estate, gold, etc.
Chinese gold demand increased by 100+ tons in a year for this reason. China is the Hotel California. You can check in, but you can never leave. You can't take your money out of the country, so you buy gold. Or four apartments. Or a new Buick.
But China knows this, and they're trying to fix it. Three rate increases since October, increased bank reserves, and talk of allowing investment outside of the country -- all of these are very bearish for Chinese gold demand. The Chinese demand was a one-off scenario in 2010, and it will decline in 2011 as the Chinese modify their fiscal policy.
If you see a decline in Chinese demand in 2011 (which we will), and at the same time have the removal of the ETFs as buyer (which has already happened), it is not going to be pretty -- especially for the miners. Most of them are un-hedged now, and when gold trades back down to their production costs, it is going to be an all out disaster. Barrick Gold (NYSE:ABX) even issued $4bn in equity to buy back their hedges. Oops. Just like in the early 2000s, when everybody hedged up at the bottom, they're all taking their hedges off at the top.
I don't know what's a better short ... gold or the miners.