Gold Demand of China, India & the Arabs

November 30, 1998
Founder & Chief Editor of Gold Eagle

Contemplate the enormity of the following. There are 1.2 billion Chinese, 1.0 billion Indians and 1.1 billion Arabs in the world. That represents nearly 60% of the world's population. Your response might be, "SO WHAT?!" …Well, here's the WHAT!

60% of the globe's populous has a deep ingrained affinity to gold. To determine the origins of gold's emotional attraction, one need study the antiquity of all three cultures -- which is NOT the purpose of this report. Suffice it to say the shiny yellow has always played a cardinal role in the lives of all the inhabitants of China, India and the Muslim countries.

This unique cultural trait assumes great significance in relation to recent studies and events on this particular subject.

China & GOLD -

Chinese newspaper calls for increase in gold reserves

CHINA should increase gold reserves to help diversify the nation's foreign exchange holdings, the official Financial News said recently.

A Reuters news report recently announced that Financial News, a newspaper published by PEOPLE'S BANK OF CHINA (PBC), urges an increase in gold reserves to diversify the nation's foreign exchange holdings. China's gold reserves stood at nearly 13 million ounces at the end of September, unchanged from the end of last year, official figures showed. (This miserly amount of the Midas metal pails by the US government's hoard of 262 million ounces)

China's official foreign exchange reserves amounted to a whopping US$144 billion at the end of October this year, while gold reserves were a paltry 3% of total foreign exchange reserves - compared with 95% in 1978, the paper said.

There are persistent rumors on the Internet the Chinese government is worried that their financial system is so over-whelmingly dependent on the currency ofjust one country - which, incidentally, has its own serious economic problems. "If there are problems with the U.S. dollar, there will be an international catastrophe," said the Financial News, published by the PBC (central bank). "Reducing reliance on the dollar, and maintaining greater diversification in foreign exchange reserves is the only way to reduce the risk," it said. "As a result, an increase in our country's gold reserves is necessary." There is NO ambiguity in this statement! China WILL increase its gold reserves! The only question is HOW MUCH MORE GOLD WILLTHE SINO-NATION BUY?

The newspaper also said Beijing should allow individuals to freely buy and sell gold and encourage residents to hold the yellow metal. Heretofore, Chinese residents can only buy gold jewelry and other ornaments through retail stores. Please note gold jewelry and other ornaments have ALWAYS been a form of savings in China since time immemorial.

Certainly, the news that the emerging Euro will hold 15% of its own reserves in gold has NOT been lost on the ultra-conservative Chinese government. "Encouraging civilian reserves of gold has strategic significance and economic value," said a director of the PBC's official news vehicle. (Can you imagine the immediate and dramatic impact on gold's price if the FRB in the U.S. made such an emphatic statement in one of its monthly publications?) "In case of an economic crisis, the state could buy gold from residents and use it to pay back foreign debt," the Financial News said.

The population of China is 1.2 Billion.

India & GOLD -

In 1992 India introduced deregulation allowing Indians returning from abroad to bring in 5 kilograms of gold (161 troy ounces) -- the import policy has been further liberalized to allow 10 kilograms per person.

In October last year, import licenses were scrapped and, for the first time, a group of state-run agencies and banks were allowed to make unlimited gold imports. Unquestionably, India's government and populace are accumulating gold.

To assess the draconian magnitude of India's insatiable hunger for gold, excerpts from the insightful and revealing study, "Why Indians Love Gold", will be mentioned here. The entire report may be read at: http://www.gold-eagle.com/editorials_98/madhok101598.html

"When you think of Gold you think of India—world's largest consumer of Gold. Official Gold imports into India are estimated at 700 tonnes for 1998. This figure does not include gold jewelry imported by Indians returning after foreign travel, and the vast amounts of Gold smuggled into India."

"From time immemorial Indians have been in love with Gold. The predominant Hindu population finds mention of gold as a commodity of immense value in their religious books."

"From ancient times Gold (and gold jewelry) has enjoyed safe-heaven status. Gold jewelry is the only way to protect against depreciation of the Indian rupee against US dollar. In the long term the Indian rupee price of Gold has been in an up-trend. Inflation has continuously, year after year, eroded the value of currency."

"Based on demographical and cultural studies of India, one may accurately conclude that its Gold demand cannot go down unless the psyche of the Indians undergoes a sea change—a very unlikely event in the next few decades."

"With myriad problems facing currency and stock markets all over the world, and a billion Indians supporting the demand for Gold, isn't it time for the GOLD BEARS TO WATCH OUT?"

The population of India is 1.0 Billion.

Arabs & GOLD -

Islam recognizes few national boundaries. This is a common cultural factor which historically and emotionally binds all Arabs - regardless of their country of origin. It is their faith in Islam -- they are all Muslims. (Note: please be aware that although Iran is a muslim nation, it is not Arab. Nonetheless, it is included for the purposes of this report)

Much of the following commentary are extracts from a provocative and erudite report called, "The Islamic (Gold) Dinar" by Jay Taylor. The entire report may be read at: http://www.gold-eagle.com/editorials_98/taylor112598.html

"The Islamic Dinar is a newly created 100% gold currency that its backers hope and believe will become the currency of more than one billion Muslims. The organizers of this currency not only see the Islamic Dinar as an eventual rival to the U.S. Dollar as a reserve currency, but are hopeful it will usher in the demise of the U.S. Dollar."

"One of the reasons given for the continued insane rise in Wall Street has been the flow of money out of the Asian countries into the U.S. markets in search of a safe haven. But this makes no sense to the tens of millions of Muslims in Indonesia who are now suffering through a fate worse than we faced in the 1930's. Indonesia, which is virtually 100% Muslims, contains the 4th largest population in the world."

"With a total Muslim population of 1.1 billion (19.2% of the world's total), if even a small percentage of Muslims begin to demand Islamic Dinars as their medium of exchange instead of paper, it could have a colossal effect on the price of gold."

"Timing is difficult to figure here, but 1.1 billion Muslims beginning to opt for real money rather than the fake stuff, portends well for the price of gold in the near future."

The Arab population (Muslims) is 1.1 Billion.

At the beginning of this report the question was posed as to the significance of 3.3 billion people from the EAST having a strong affinity to GOLD. Specifically, why can nearly 60% of earth's inhabitants have a substantial impact upon the price of the shiny yellow metal? Whereas this great mass of human beings does NOT enjoy the high income of Westerners, its prodigious numbers will eventually precipitate a gargantuan surge in the value of GOLD. The roots of this motivation is a mixture of their culture, history, religion and current economic conditions.

The EAST does not have MUCH, but they well do have MANY. Eastern cultures tend to act in unison as a group, whereas Western cultures are more independent in modus operandi. Why this is so is beyond the scope of this study. Nevertheless, it appears relatively certain the combined buying force of China, India and the Arab nations will indeed cause GOLD prices to eventually surge. The all important question is by HOW MUCH?

How Much Could Each Eastern Entity Affect Gold's Price?

Frankly, a conscientious attempt to answer this monumental question would be equivalent to a doctoral thesis. Nevertheless, a few very brief guidelines will be presented for those students inclined to tackle this task.

Firstly, China's impact on GOLD will inevitably be as impressive as its Great Wall of China. The Sino-nation has the largest monetary reserves in the world --topping US$144 billion - composed of a mere 3% in gold reserves. Now, let us assume that the PBC decided to increase its gold reserves by an additional 10% within the next one to two years....(13% is quite reasonable considering the ECB will hold 15% of its own reserves in gold)....this implies that the PBC will have to spend at least US$14 billion to buy gold.... Therefore, at the current price US$295/oz. it means 47 million Gold ounces will be purchased - which is 1,426 tonnes.

1,426 tonnes is indeed a formidable amount of GOLD. But this analyst questions whether this is enough for the Chinese, whose GOLD affinity is more based on thousand of years of tradition and emotion than other factors.

Since there are no universally accepted standards or benchmarks of how much a country's foreign reserves should be in GOLD, population will be used for lack of a better reference point. Using the U.S. as a 'standard yardstick', we see a country should have one ounce of gold in reserves per capita. The U.S. possesses 262 million GOLD ounces for its nearly equal population (ergo, one ounce per capita). Were China to achieve the same financial backing, it would require 1.2 BILLION OUNCES OF GOLD. However, since it now only has the piddling amount of 14.4 Million ounces, it needs to buy in the market place nearly 1.2 BILLION OUNCES - or 37,000 tonnes of the shiny yellow. This represents approximately 14 years of the entire world's gold mining production. And by shear coincidence, it is about that same amount of gold in deposit today in all the Central Banks of the world. Without one iota of doubt, a demand of this magnitude will put GOLD's value in orbit for years to come.

China's potential GOLD demand is 37,000 tonnes.

Secondly, India's perennial demand is legend. Based upon rapidly growing affluence, and the government's liberalization of regulatory norms, it is forecasted India will continue to be the Number One consumer of the Midas metal. Again, if we estimate GOLD possession based upon the U.S. "norm" of One Ounce Per Capita, then we may estimate future Indian demand of another 31,000 tonnes.

India's potential GOLD demand is 31,000 tonnes.

Finally, using the same criteria for Arab countries as was used for China and India, it is easily determined that:

Arab Countries' potential GOLD demand is 34,000 tonnes.

The potential Eastern GOLD demand sums to 102,000 tonnes of GOLD - equivalent to 39 years of world production.

This analyst well knows that the above GOLD demand estimate is OUTRAGEOUS -- and therefore far from reality. Consequently, many skeptics will rightfully chafe at the bit, stating the "measuring stick" of one ounce per capita is NOT justifiable. Quite True! Quite True! But this analyst's rebuttal is that THERE IS NO UNIVERSALLY ACCEPTED STANDARD to determine how much GOLD a Central Bank - or a country's population - should have FOR WHATEVER REASON. What is NOT in dispute is the fact that as the most financially stable country in the world (at least until now) - the U.S. possesses One Ounce Of GOLD Per Capita. Nonetheless, this is indeed a consideration when trying to determine how much gold a nation and its citizens should possess.

If you have a better reference point to determine how much GOLD in reserves a country should have to promote monetary stability and achieve currency diversification of foreign reserves, then by all means please share it with the rest of us.

Meanwhile, whatever benchmark is employed, the GOLD demand of China, India and the Arab nations may soon blow the lid off the Shiny Yellow value. THAT… I believe is a given.

GOLD's future is in the East.

Founder of Gold-Eagle in January 1997.  Vronsky has over 42 years’ experience in the international investment world, having cut his financial teeth in Wall Street as a financial analyst with White Weld. Vronsky speaks three languages with indifference: English, Spanish and Brazilian Portuguese.  His education includes a degree in Petroleum Engineering from the University of Oklahoma, a Liberal Arts degree from Hartnell College and a MBA in International Business Administration from UCLA – qualifying as Phi Beta Kappa and Tau Beta Pi for high scholastic achievements.  Vronsky believes gold and silver will be recognized as legal tender in all 50 US states and many countries worldwide.  You may reach I. M Vronsky at: vronsky@gold-eagle.com and/or vronsky@bellsouth.net

Nevada accounts for 75% of U.S. gold production.

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