The Pan Asia gold exchange, set to open in June 2012, will allow millions of Chinese investors to participate in buying physical spot gold, as well as its derivatives. This is expected to remove some of the price-setting power of western exchanges like COMEX, as well as the now-dominant London OTC market operated by the LBMA group of banks. But the Middle Kingdom is not finished with its assault on the existing status quo in the gold market. It continues to take more steps to set itself up as the world's dominant arbiter of gold prices.
The opening of the first gold vending machine in Beijing Wangfujing shopping district is the beginning of a vast plan. Bejing Agricultural Commercial Bank expects to open 2,000 additional gold vending machines to allow China's rising urban middle class to purchase physical gold coins and bars. As the idea catches on, and if the vending machines prove as successful as they have in Germany, where they were pioneered, the sale of physical gold to a market comprised of 1.3 billion people is sure to put upward pressure on gold prices.
The first gold vending machines were rolled out in Germany where they are produced, and soon after, spread to other parts of Europe and Japan. There are also a few in operation in Las Vegas, Nevada.
Chinese customers will be able to use cash, as well as debit and credit cards, to buy gold as easily as they now make deposits and withdrawals from existing ATMs. The Chinese gold machines are also expected to include a quick-test/buy-back feature, which would give paper currency notes in exchange for gold, upon request. Let us take this one step further. Logic, reason, and common sense tells us that if gold does become a "Tier 1" banking asset, now being urged by many powerful financial interests, including (amazingly) the LBMA, gold vending machines will fully transform into full-fledged gold ATMs. In other words, it won't take much before citizens will be able to make gold deposits and withdrawals from gold-denominated bank accounts at various banking institutions.
A recently published an article in Mineweb summarizes the situation quite succinctly. It quotes Albert Cheng, managing director of the Far East at the World Gold Council, who said in March 2010 that his analysts had calculated that gold demand in China would double by 2020. He now says:
We now believe this doubling may in fact be achieved sooner. China's appetite for gold has increased rapidly over the past few years.
The worldwide penetration of gold ATMs facilitate easy purchase, withdrawal and "deposits". They are sure to increase gold demand. In Japan, the German-made machines are dispensing both silver and gold. We can assume that eventually, the Chinese based machines will also dispense platinum since China is the biggest investment market for the white precious metal that is 15 times as rare as gold. There is, in fact, nothing that stops operators from dispensing gold, silver, platinum and/or palladium in the machines.
Many economists and national governments do not like that the gold standard makes the type of economic "engineering" they think the world needs, such as "liquidity injection" and so-called "quantitative easing", difficult or impossible. But, if gold ATMs are combined with the return of gold to Tier 1 banking asset status, the yellow metal will return to its historical reserve currency status on a de-facto basis. When that happens, the world returns to the gold standard, regardless of the wishes of politicians, economists and central bankers. An CNBC poll showed that 69% of investors prefer a return to the gold standard, with only 24% against, and 7% unsure.
Obviously, a de-facto "gold standard" means gold prices will move into the 5 figure area. Gold supplies are inelastic, and they are being pitted against continually increased demand. The more immediate implications of the opening of the physical gold market to 1.3 billion Chinese who will now be able to use vending machines to buy it will simply be a continuation of slow, but relentless, upward pressure on gold prices, caused by the physical market. That does not mean we will no longer see heavy volatility. The paper price of gold, which is reflected in the spot price, is the result of actions in the highly leveraged and unstable futures markets. Until the spot price is discredited in the minds of a majority of gold dealers, it will be used as a base for physical gold prices, subject to varying premiums.
A position in gold can be taken in a number of ways, most of which are outlined in the last part of a previous recent article by this author. The impending installation of 1,999 more gold vending machines, as well as others being installed elsewhere in the world, is just another example of the "gold train" chugging along, as it toots its horn loudly in the unwelcoming ears of the naysayer.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.