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China's Insatiable Appetite for Gold

Gold bugs and naysayers alike take note. When the world's second largest and fastest growing economy liberalizes gold ownership by individuals, who happened to be the planet's most fastidious savers at a 17% rate, you better pay attention.

Among other reforms, the Middle Kingdom is repealing the death penalty for the illegal importation of the yellow metal. The potential demand this will unleash boggles the mind. China historically has been a hard currency culture, and only started using paper banknotes when they were forced upon them as a way to repay debts by foreign colonial powers in the late 19th century.

But the Chinese desire to own gold and silver never went away. In 2009, China imported 73 metric tonnes of the barbaric relic worth $2.6 billion to bring its official holdings to 1,054 metric tonnes. That leaves it far behind the US, which at 8,133 tonnes is the world's largest gold owner. China's gold holdings amount to only $37 billion, or only 1.5% of its $2.45 trillion foreign exchange reserves.

To get China's gold investment up to American levels on a GDP basis, it needs to buy 25 million ounces worth $31 billion. That amounts to 34% of the 2009 global annual production of $110 billion. Being astute traders, the Mandarins at the People's Bank of China are loathe to chase prices, so don't expect them to make up the gap in one shot. Instead, expect a quiet diversion of new current account surpluses out of the greenback and into gold.

You can also expect other emerging market central banks to make the same move. If non G7 central banks from the current 20% average of reserves to the 35% weighting now owned by the G7, it will require 1.3 billion ounces of new purchases, or 20% of the total world supply. I can hear the "BUY" tickets being written already.

The Chinese aren't going to provide the next spike in gold prices, but they are building a floor higher than anyone expects. That's why the last sell off took us down only 8% to $1,158 before a rebound.

Courtesy: Mad Hedge Fund Trader




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  • Anonymous on August 31 2010 said:
    This and the Chinese locking up the rare earth elements are why the 21st century is going to belong to them. We're doing all most everything wrong and they're doing all most everything right.
  • Anonymous on September 01 2010 said:
    I agree about rare earth elements, but why can't the US with est. 15% of world holdings exploit that resource? Scary that they restrict their exports of REE.
  • Anonymous on September 01 2010 said:
    Well said. The worlds biggest savers are buying gold and silver. How long before they stop buying US debt via the treasury auctions? Wake up America - the 40 year experiment in fiat currency is coming to an end.
  • Anonymous on September 02 2010 said:
    Time to start learning Mandarin..
  • Anonymous on September 08 2010 said:
    Why learn Mandarin? Even if they become the world's leading power, they have been studying English for years. Any contact with them will be in English.
  • Anonymous on September 09 2010 said:
    Why learn Mandarin? So you can understand the Chinese whispers going on behind your back when they're not speaking to you in perfect English...!

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