Gold and China

CHINA (Aug 11) The Chinese account for over a third of total gold demand. We know therefore that any development in China - either positive or negative - has a rippling effect on gold, as well as other commodities that were bid up to new record heights during the Chinese credit bubble.

But the problem in China is not only an overextension of credit and an urgently needed deleveraging of its banking sector. It is, more importantly, the cleansing of a miscoordination of economic resources. The issue at hand is therefore not the total level of credit, but the micro-economic catastrophy that an inflow of excessive credit causes.

But what does this mean for future gold prices?

The Chinese demand for gold essentially comes from three segments: (1) the People’s Bank of China; (2); the banking sector; and (3) Chinese citizens.

We can count on the Chinese central bank to pursue the same steady course they have been pursuing for a while: buying additional gunpowder by increasing their gold reserves.

China has one of the world's highest saving rates, and the public faces few investment options. With negative real interest rates, in case the PBoC does lower rates to support the banking system, gold seems to be an opportune alternative.

The main driver of increasing gold demand from China should therefore be the general public. Gold demand of the Chinese public equates to around 800 tonnes a year, but could increase in accordance with the Chinese slowdown.

Chinese gold demand will be key to gold prices in the near and more distant future due to sheer size.

(Source:  Olav Dirkmaat via GoldRepublic)