Why Are The Chinese Stampeding Into Gold?

December 9, 2013

Not only Chinese Banks but also the general population of the Sino nation are snapping up all the gold they can lay their hands on at these bargain basement prices. The recent gold price consolidation is a godsend for the Chinese. This begs the question:   Why are the Chinese stampeding to the shinny yellow?

The answer to this provocative question is that there are several factors fuelling Chinese consuming passion for gold accumulation.

FIRSTLY,  investment alternatives are limited to only two assets:  The Shanghai Stock Exchange Index ($SSEC) and GOLD.   To be sure gold’s  comparative performance leaves stocks in the $SSEC literally dead in the water.  Specifically, while gold rose +65% since late 2007, stocks in the $SSEC were mercilessly hammered down -62% (as of 12/06/13).   Think of the mind-boggling difference…of 127%.  Ergo, all rational intelligent citizens of China will obviously choose hard asset profitable gold over fiat paper stocks, rotten with horrific losses during 6 long years.

Please see the Gold vs Shanghai Stock Exchange Index performances:

SECONDLY, the renminbi (aka yuan) price of gold since 2001 has gone ballistic..ie the yuan price of gold has soared +241% (ie 2200 to 7500).  And while the price has corrected 34% (11300 to 7500),  Chinese investors consider it a godsend as they snap up gold at these bargain basement values (unlike investors in the western world, who wring their hands looking for the bottom).   See below the gold price in Renminbi.

THIRDLY,  China must diversify its humongous FOREX Risk out of the US Dollar. It is well known China is the world’s largest buyer of US Treasuries…owning $1.3 TRILLION.  

US TREASURY HOLDERS:   http://www.ustreas.gov/tic/mfh.txt  

Moreover, less than 2% of China’s Total Foreign Reserves are in gold. This is in sharp contrast with the U.S., which has 76% of its Total Foreign Reserves in gold.  For more on this subject, please read China’s Gross Shortage of Gold Reserves:

http://www.gold-eagle.com/article/china%E2%80%99s-gross-shortage-gold-reserves

GOLD RESERVES BY COUNTRY:   http://en.wikipedia.org/wiki/Gold_reserve

FORTHLY,  China’s Gold Imports Surge during recent years.

Chinese November Gold Imports Soared 91 Tons.  Total gold imports in 2012 were 720 Tons. If last year is any indication, the December total will be roughly the same amount, and will bring the total 2013 import amount to over 800 tons, double the 393 tons imported in 2011.   Chinese Gold Imports from Hong Kong accelerate month after month after month:

China’s Irresistible Gold Rush

The year to date net gold imports from Hong Kong to China total 967 tonnes. That is an astonishing amount. To put this figure in perspective: the global gold production in 2012 was close to 2600 tonnes; and the U.S. (having the highest gold reserves in the world) has 8133 tonnes of gold reserves.

 

 

China’s FOREX Reserves vs The Price Of Gold

Indubitably, the chart below is fascinating. It compares the rise in China's Total FOREX reserves with the rise in the dollar price of gold, both of which have been impressive to say the least.  Both China’s Total Foreign Reserves and the price of gold increased by many orders of magnitude over roughly the same period.  This implies that the increase in China’s Total Foreign Reserves may be the prime motive force fuelling gold prices to record levels…indeed since 2001. 

Like the sage Chinese saying:  “A picture is worth a 1000 words.” 

Don Luskin, a monetary expert explains how China's FOREX reserves are connected to the rise in the price of gold. He argues that the outstanding stock of gold is relatively fixed—growing only about 2% per year—but that the demand for gold has jumped by orders of magnitude since China, India, and other emerging markets have enjoyed explosive growth and prosperity gains. In other words, the number of potential buyers of gold has risen much faster than the supply of gold, so naturally gold's price has increased. This is not a story about massive money printing and hyper-inflationary consequences, it is a story about a surge in the demand for the limited supply of gold…WHICH SHOULD CONTINUE UNABATED FOR THE NEXT 5 YEARS.

Per the chart above, the price of gold has risen apace with China’s increase in Total Foreign Reserves since 1998. Following are the exact yearly figures for China’s Total Foreign Reserves since 2001:

China’s Foreign Exchange Reserves:  2001-2012

And if it is true that the price of gold runs parallel with China’s Total Foreign Reserves (ie 26% CAGR), then the price of gold today should be approximately $5,162/oz.  As I have already commented twice above in this analysis, today’s severely discounted gold price is a godsend for those who know financial history and who are patient…as is in character with China’s historical culture.

FIFTH, China's gold supply shortfall is expected to reach 700-800 tonnes this year due to strong physical demand, an official with the World Gold Council (WGC) said recently. In addition to domestic production of over 400 tonnes, the total consumption (in China) is seen to exceed 1000 tonnes this year," Zheng Lianghao, managing director of the WGC's Far East division told a conference in Shanghai. Zheng said physical demand in China and India, the world's top two consumers, remained strong in the third quarter.

AND FINALLY, the Renminbi is destined to replace US$ as the Global Reserve Currency.  But this is a provocatively developing story that requires much more research.

More by vronsky:    http://www.gold-eagle.com/authors/vronsky

We (Gold-Eagle.com) provide regular commentary and analysis of gold, precious metals and the markets in general. Be the first to be informed by joining our free email newsletter. You can also stay connected by following us on Facebook, Twitter, or Google Plus .

Free Gold-Eagle Newsletter!

  • Fresh weekly insights on gold, precious metals and the economy
  • Leading authors from around the globe
  • Always free, and your email address is never shared
  • Stay informed!!

 

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 soon 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

Gold is found in nature in quartz veins

Gold Eagle twitter                Like Gold Eagle on Facebook