Well, almost. The dictionary defines cliché as an "overused expression or idea." And that's what the topic of "China and Gold" nearly is.

In case you've missed it, here's an elaboration: As 1.2 billion Chinese gain more and more spending power, it follows that they'll be buying more and more gold.

Overused idea or not, this assumption is based on some pretty accurate information.

The Chinese, for instance, are already the world's biggest users of at least five other commodities. The list includes cement, steel, iron ore, copper and tin. Given this growing appetite, can gold be far behind?

A rising tide raises all boats. And the Chinese economy is nothing if not a rising tide. Probably more like a tsunami, in fact. China boasts a ferocious 9.5 percent growth rate (over twice our 2004 4.4 percent). And if it continues like this, the nation will double its economy in a very short time. That will translate into a lot more discretionary income for the average Chinese "Joe."

A whole lot more, in fact. As it is, the Chinese already have loads of money in the bank. According to China's central bank, year-end savings totaled 1.2 trillion yuan. How much is that in dollar terms? About $145 billion.

That's $145 billion earning very little interest (which, even then, is subject to a 20% interest tax).

And that uninspiring investment is opening the door for gold. "The Chinese are getting richer, and have very high savings rates," said Graham Birch, who helps manage mining assets for Merrill Lynch in London. "As they earn more money, they will spend more on things like jewelry."

Gold jewelry, to be precise.

It's probably no exaggeration to say that gold is China's most beloved asset. Consider this from the World Gold Council: "Most Chinese love gold, and it has been part of the Chinese culture and tradition for 5,000 years. Gold is still widely regarded as the most reliable tangible asset, and this is especially true when access to alternative investments is limited or virtually non-existent, as in the rural areas of China. Apart from its intrinsic value, gold is also prized as a symbol of status and an important accessory. No well-to-do man or woman would be seen without it on special occasions."

So it's not as if the precious metal needs a gigantic push to gain acceptance in China. Even so, that's exactly what it's getting.

Consider these five recent gold-promoting developments:

1/ The nation's four biggest commercial banks-Bank of China, Industrial and Commercial Bank of China, China Construction Bank and Agricultural Bank of China-have now been given the go-ahead by the Chinese Banking Regulatory Commission to market gold.

That effectively means China's gold distribution "horsepower" just got raised several magnitudes of order. And with more gold accessible throughout the nation, lots more of it will end up sold. It's really that simple.

2/ Two of these big banks have also opened "gold share" services. Now investors who open specific accounts can quickly buy and sell gold shares. Bank of China launched one such account in late 2003-the first paper gold product on the mainland-while China Construction Bank inaugurated its "Account Gold" last February.

3/ Private investors can now buy physical gold online through the Bank of China and other Shanghai Gold Exchange members, too.

4/ The Shanghai Exchange even lowered the bar for gold purchases-literally offering smaller, 50-gram gold bars for trade. These are equivalent to 1.76-ounces.

5/ Through the People's Bank of China, China's central bank has also proposed the establishment of a gold futures market. While this may yet be a ways off, such sophistication will only put more precious metal into the "People's" portfolios.

All of which makes for an interesting dynamic.

You have 1.2 billion Chinese… with one of the lowest gold ownership rates in the world. It figures out to be 0.1 grams of gold owned per capita (India, meanwhile, has 0.73 grams and the U.S., 1.41 grams).

Now that's one vacuum just aching to be filled.

Why liberalize things after "gold hoarding" was expressly forbidden back in 1949?

It wasn't out the goodness of China's still communistic heart. In recent years, as the dollar China is so utterly dependent on sunk to new lows, the Chinese government has quietly scrambled to increase its paltry reserves of gold.

It still needs tonnes more. China's foreign exchange reserves currently amount to a whopping $450 billion-the largest dollar reserve in the world-yet the nation's gold reserves are a miniscule 21 million ounces.

By contrast, the U.S. purportedly has 287 million ounces, not quite an ounce of gold for each of our nearly 300 million citizens. For the Chinese government to attain anywhere near that lofty per-capita standard, would theoretically take 14 years of the planet's entire production of the precious metal.

Needless to say, this just isn't going to happen. And the economic and political fallout of even attempting to do so-of officially throwing in the towel on the dollar-could herald a global depression of nightmarish proportions.

But give China credit for being subtler than that. If, instead of making a higher gold reserve its official stated policy, China liberalized gold ownership laws so its citizens could load up on the precious metal, the government would have access to a large, latent gold reserve…yet not officially undermine the dollar.

One of China's state-run newspapers isn't bashful about outing this slick tactic. "Encouraging civilian reserves of gold has strategic significance and economic value. In the event of an economic crisis, the state could buy gold from residents and use it to pay back foreign debt," China's Financial News quietly reported.

Notwithstanding the alarming prospect of a totalitarian government one day confiscating privately-held precious metals at bargain-basement prices (or at no price at all), the Chinese people are wholeheartedly going for the gold.

All of which is why both the World Gold Council and the Beijing Gold Economy Development and Research Centre recently came out with a report recommending gold as the investment of the day.

It would be eminently prudent, was the report's bottom-line recommendation, to invest up to 10 percent of one's individual assets in the precious metal.

Albert Cheng, managing director of WGC Far East, wrote in the report: "During market fluctuations, gold moves in a direction opposite to all investment tools, including stocks, bonds, securities, funds and foreign exchange,"

While some might not use such absolute terms in describing gold's tendency toward "negative correlation," Cheng's other words may be beyond reproach. He called gold only one of a handful of financial assets "without a corresponding liability."

So once again we hear that it is eminently prudent to put gold in our portfolios.

Funny…that's even starting to sound like a cliché now.

Kevin DeMeritt
www.goldcentral.com
July 22, 2005