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How Do the Chinese View the Gold Market?

Have you ever wondered what the typical Chinese gold investor thinks about our Western ideas of gold? We read month after month about demand hitting record after record in their country – how do they view our buying habits?

Since 2007, China's demand for gold has risen 27% per year. Its share of global demand doubled in the same time frame, from 10% to 21%. And this occurred while prices were rising.

Americans are buying precious metals, no doubt. You'll see in a news item below that gold and silver ETF holdings just hit record levels. The US Mint believes that 2012 volumes will surpass those of 2011.

But let's put the differences into perspective. This chart shows how much gold various countries are buying relative to their respective GDPs.

It's widely believed that the majority of the gold flowing into Hong Kong ends up in China, so its total is probably close to double what the chart reflects. Even if none of it went to China, coin and jewelry demand is 35 times greater than the US, based on GDP.

The contrast between how our two nations can buy bullion is striking…

  • In China, you can buy gold and silver at the bank. My teller looked at me oddly when I asked.
  • Bullion is available for purchase at Chinese post offices. I wonder how my local postman would respond if I asked for a tube of silver Eagles.
  • Mints are readily accessible to retail customers. Here, I can only order proof and commemorative products from the US Mint and am forced to go to an independent dealer.
  • A new product design is manufactured every year. This being the Year of the Dragon, many bullion products are emblazoned with dragons. You can still buy last year's rabbit, and next year it will be a snake. The US has two designs, the Eagle and Buffalo; the latter was introduced in 2006 and is available only in gold (if you see a silver Buffalo, it is a "Round" manufactured by a private mint, not the US Mint).

Some will point to cultural affinity to account for the differences. There's some truth to that, though this is a much greater factor in India. Even there, gold jewelry is not viewed as a decoration or an adornment; it's a store of value. It's financial insurance in a pretty bow. In India, gold can be used as collateral, regardless of its form. It's not just an investment that they're trying to make money from; it's more important than that.

But certainly the differences can't all be attributed to culture…

You've likely heard how government leaders in Beijing have been encouraging citizens to buy gold and silver. This would be akin to seeing your local Congressman or President Obama appearing on TV and imploring you to buy some gold and silver. (Utah made gold legal tender, but it was mostly a symbolic move.)

Chinese radio and TV spots, along with newspaper ads, talk about "safeguarding your wealth" and putting "at least 5% of your savings" in precious metals. I haven't seen this here except from dealers on cable TV. Can you imagine Ben Bernanke appearing in a commercial during American Idol, encouraging you to buy gold Eagles?

No, what I hear from politicians about precious metals is nothing but the sound of crickets chirping, save Ron Paul. And the mainstream continues to claim gold is in a bubble. We've pointed it out before, but in case any of them are reading, there are two criteria for a bubble: first, a massive price increase, such as the gold price doubling in less than 7 weeks like it did in 1979-'80... which, of course, hasn't occurred in this bull market. (Yet.)

The second criterion is widespread participation on the part of the public. I don't hear celebrities and TV anchors bubbling on about the latest gold stocks. Most people I know outside Casey Research aren't talking about the great price they got on a silver Maple Leaf. Most investors I talk to say their friends, family, or co-workers aren't scrambling to snatch up gold Eagles. And the #1 reason we're not in a bubble is because Eva Longoria still hasn't asked me out on date – something she'd only do because I'm a gold analyst.

And with apologies to those of you who do know history, I think the Chinese have studied history a little better than many of us. The lessons are right in front of us, though I don't hear this kind of data very much on CNBC…

  • Morgan Stanley reports there is "no historical precedent" for an economy that exceeds a 250% debt-to-GDP ratio without experiencing some sort of financial crisis or high inflation. Total debt (public and private) in the US is 300%+ of GDP.
     
  • Detailed studies of government debt levels over the past 100 years show that debts have never been repaid (in original currency units) when they exceed 80% of GDP. US government debt is approaching 100% of GDP this year.
     
  • Peter Bernholz, a leading expert on hyperinflation, states emphatically that "hyperinflation is caused by government budget deficits." This year's US budget deficit will be about $1.3 trillion. It's expected to total $6 trillion during Obama's first four years in office.

What do we hear instead? That the country will drop into recession if current amounts of spending and outlay of benefits are reduced. I think it is quite the opposite; it will be worse if our leaders continue down this path of debt, deficit spending, and printing money.

What I'd love to see on CNBC is a spot with Doug Casey saying this: "Anyone who thinks they have any measure of financial security without owning any gold – especially in the post-2008 world – is either ignorant, naïve, foolish, or all three." I bet that'd get the airwaves buzzing.

It must seem strange to many Chinese that we continue to believe in our dollars, Treasuries, and bonds more than gold and silver. And it's not just China that would view our investing habits as peculiar. Indeed, as the above tables implies, our views on precious metals are in the minority.

My fear is that regardless of what form the fallout takes, many of my friends will be caught off guard. Probably many of yours, too. As the value of dollars continues to decay and inflation creeps closer and closer and then higher and higher, many investors will feel blindsided. Many Chinese citizens will not.

Given China's aggressive buying habits, my suspicion is that many of them will probably wonder why we didn't see what was happening all around us, why we didn't learn from history, and why we didn't better prepare.

Part of the reason why American dollars are losing value can be traced to Chinese actions as well: Realizing that the US government was not going to rein in its profligate spending, the Chinese have stopped investing in the US economy and are now dumping dollars. This, of course, simply adds to the US government's problems... but it provides ways for you to turn a tidy profit.

Comments

  1. patrick says:

    Gold, up, up and away to 1800. 1900. 2000...

  2. Sparrows345 says:

    Potential problems to the bullish scenarios:

    1) Too much optimism in the gold community, there are no sure things in any markets. Ever.

    2) Govt. fraudulently reports inflation, and no one cares. All the alleged stimulus so far has not produced inflation that causes fear for anyone. If they pull back on stimulus for any number of reasons, and the expectations of such would be reflected long before the news.... the answer should be clear.

    3) Mining stocks have performed horrendously for 4-5 years now, this is a massive negative divergence as many times the metals price follows the price actions of those canaries in the mines one way or another....

    4) The US dollar has been the haven for safety, as twisted as that is. That currency did great during the 90's with higher taxes/rebounding economy, can't be ruled out it won't happen again. Falls into never a sure thing category.

    5) The debt/300% ratio is not considered reality by most, it's the spin and perception that effects the markets not necessarily reality.

    Bottom line This could go either way quite easily. We can't control that, only control how we react to it by protecting capital etc.

  3. John says:

    The US government doesn't run Asmerica, big money does. It should not come as a surprise that big money won't accept an economy that isn't consumer (consumption) driven. In other words, the country is doomed to follow the same path...down the drain.

  4. John Riches says:

    If the market volatility this week in gold is a result of "market manipulation" presumably by a US Government agency, It is clearly not in the US Govt's interest to see alternatives to the US dollar strenthen to much. Will foreign Govt's see this as an opportunity to buy more gold, or will they follow the dictum of "Don't fight the Fed's"?

  5. Julius Loewy says:

    Doesn't the US government realize that with these horrendous budget deficits we are going to end up with superinflation like other countries(Germany's Weimar republic and others)?

  6. gg says:

    Is it better to own physical gold or stock in gold mines or gold/slv ETF's?

    • Vic says:

      There is no right answer to your question since all three choices have advantages and disadvantages depending your own comfort zone. BTW, there is a fourth choice. Buy into specific royalty stocks. The lend up front monies to a miner in return for royalties when the miners starts making deliveries of the gold or silver. There are several variant royalty companies. Use a search engine for this info and ther are many blogs out there on your original three options.

      How Do the Chinese View the Gold Market?

      December 1, 2012 By Jeremy 3 Comments

      Have you ever wondered what the typical Chinese gold investor thinks about our Western ideas of gold? We read month after month about demand hitting record after record in their country – how do they view our buying habits?

      Since 2007, China's demand for gold has risen 27% per year. Its share of global demand doubled in the same time frame, from 10% to 21%. And this occurred while prices were rising.

      Americans are buying precious metals, no doubt. You'll see in a news item below that gold and silver ETF holdings just hit record levels. The US Mint believes that 2012 volumes will surpass those of 2011.

      But let's put the differences into perspective. This chart shows how much gold various countries are buying relative to their respective GDPs.

      It's widely believed that the majority of the gold flowing into Hong Kong ends up in China, so its total is probably close to double what the chart reflects. Even if none of it went to China, coin and jewelry demand is 35 times greater than the US, based on GDP.

      The contrast between how our two nations can buy bullion is striking…
      In China, you can buy gold and silver at the bank. My teller looked at me oddly when I asked.
      Bullion is available for purchase at Chinese post offices. I wonder how my local postman would respond if I asked for a tube of silver Eagles.
      Mints are readily accessible to retail customers. Here, I can only order proof and commemorative products from the US Mint and am forced to go to an independent dealer.
      A new product design is manufactured every year. This being the Year of the Dragon, many bullion products are emblazoned with dragons. You can still buy last year's rabbit, and next year it will be a snake. The US has two designs, the Eagle and Buffalo; the latter was introduced in 2006 and is available only in gold (if you see a silver Buffalo, it is a "Round" manufactured by a private mint, not the US Mint).

      Some will point to cultural affinity to account for the differences. There's some truth to that, though this is a much greater factor in India. Even there, gold jewelry is not viewed as a decoration or an adornment; it's a store of value. It's financial insurance in a pretty bow. In India, gold can be used as collateral, regardless of its form. It's not just an investment that they're trying to make money from; it's more important than that.

      But certainly the differences can't all be attributed to culture…

      You've likely heard how government leaders in Beijing have been encouraging citizens to buy gold and silver. This would be akin to seeing your local Congressman or President Obama appearing on TV and imploring you to buy some gold and silver. (Utah made gold legal tender, but it was mostly a symbolic move.)

      Chinese radio and TV spots, along with newspaper ads, talk about "safeguarding your wealth" and putting "at least 5% of your savings" in precious metals. I haven't seen this here except from dealers on cable TV. Can you imagine Ben Bernanke appearing in a commercial during American Idol, encouraging you to buy gold Eagles?

      No, what I hear from politicians about precious metals is nothing but the sound of crickets chirping, save Ron Paul. And the mainstream continues to claim gold is in a bubble. We've pointed it out before, but in case any of them are reading, there are two criteria for a bubble: first, a massive price increase, such as the gold price doubling in less than 7 weeks like it did in 1979-'80... which, of course, hasn't occurred in this bull market. (Yet.)

      The second criterion is widespread participation on the part of the public. I don't hear celebrities and TV anchors bubbling on about the latest gold stocks. Most people I know outside Casey Research aren't talking about the great price they got on a silver Maple Leaf. Most investors I talk to say their friends, family, or co-workers aren't scrambling to snatch up gold Eagles. And the #1 reason we're not in a bubble is because Eva Longoria still hasn't asked me out on date – something she'd only do because I'm a gold analyst.

      And with apologies to those of you who do know history, I think the Chinese have studied history a little better than many of us. The lessons are right in front of us, though I don't hear this kind of data very much on CNBC…
      Morgan Stanley reports there is "no historical precedent" for an economy that exceeds a 250% debt-to-GDP ratio without experiencing some sort of financial crisis or high inflation. Total debt (public and private) in the US is 300%+ of GDP.

      Detailed studies of government debt levels over the past 100 years show that debts have never been repaid (in original currency units) when they exceed 80% of GDP. US government debt is approaching 100% of GDP this year.

      Peter Bernholz, a leading expert on hyperinflation, states emphatically that "hyperinflation is caused by government budget deficits." This year's US budget deficit will be about $1.3 trillion. It's expected to total $6 trillion during Obama's first four years in office.

      What do we hear instead? That the country will drop into recession if current amounts of spending and outlay of benefits are reduced. I think it is quite the opposite; it will be worse if our leaders continue down this path of debt, deficit spending, and printing money.

      What I'd love to see on CNBC is a spot with Doug Casey saying this: "Anyone who thinks they have any measure of financial security without owning any gold – especially in the post-2008 world – is either ignorant, naïve, foolish, or all three." I bet that'd get the airwaves buzzing.

      It must seem strange to many Chinese that we continue to believe in our dollars, Treasuries, and bonds more than gold and silver. And it's not just China that would view our investing habits as peculiar. Indeed, as the above tables implies, our views on precious metals are in the minority.

      My fear is that regardless of what form the fallout takes, many of my friends will be caught off guard. Probably many of yours, too. As the value of dollars continues to decay and inflation creeps closer and closer and then higher and higher, many investors will feel blindsided. Many Chinese citizens will not.

      Given China's aggressive buying habits, my suspicion is that many of them will probably wonder why we didn't see what was happening all around us, why we didn't learn from history, and why we didn't better prepare.

      Part of the reason why American dollars are losing value can be traced to Chinese actions as well: Realizing that the US government was not going to rein in its profligate spending, the Chinese have stopped investing in the US economy and are now dumping dollars. This, of course, simply adds to the US government's problems... but it provides ways for you to turn a tidy profit.

      Filed Under: Guest BloggersTagged With: casey research, caseyresearch.com, China, Gold, Guest Bloggers, Jeff Clark

      Comments

      Vic says:

      December 1, 2012 at 12:34 pm

      Great article. When QE4 hits the streets do you think our representatives will realize something is very wrong? I wonder if any of them will ever admit it and try to put the genie back in the bottle. Must likely a bait and switch with a global currency or a war distraction are my wild guesses. Whatever happens gold sits there silently waiting for history to repeat once again.

      Reply

      George Hunt says:

      December 1, 2012 at 10:45 am

      Good commentary about the metals markets. Our Secretary of the Treasury Tim Geithner proposed a few weeks ago that the U.S. should take the lid off our debt limitation controversy and just let the debt go "infinite". Of course this will allow the dollar to go the way of terrific inflation similar to what Germany's Weimar Republic experienced. The dollar will collapse and gold, silver and all commodities will soar to stupendous heights.
      A woman who lived through these years in Germany told me that she was the beneficiary of an insurance policy but she didn't claim her money because the cost of a stamp exceeded the value of her benefit!
      America will experience the same situation some day, particularly if our debt limit is "infinite" as our "fox in the henhouse", Tim Geithner proposes.

      Reply

      gg says:

      December 1, 2012 at 10:01 am

      Enjoyed your article. Too bad our government doesn't provide the same options to buy gold and silver.

      Reply
      ic

  7. Vic says:

    Great article. When QE4 hits the streets do you think our representatives will realize something is very wrong? I wonder if any of them will ever admit it and try to put the genie back in the bottle. Must likely a bait and switch with a global currency or a war distraction are my wild guesses. Whatever happens gold sits there silently waiting for history to repeat once again.

  8. George Hunt says:

    Good commentary about the metals markets. Our Secretary of the Treasury Tim Geithner proposed a few weeks ago that the U.S. should take the lid off our debt limitation controversy and just let the debt go "infinite". Of course this will allow the dollar to go the way of terrific inflation similar to what Germany's Weimar Republic experienced. The dollar will collapse and gold, silver and all commodities will soar to stupendous heights.
    A woman who lived through these years in Germany told me that she was the beneficiary of an insurance policy but she didn't claim her money because the cost of a stamp exceeded the value of her benefit!
    America will experience the same situation some day, particularly if our debt limit is "infinite" as our "fox in the henhouse", Tim Geithner proposes.

  9. gg says:

    Enjoyed your article. Too bad our government doesn't provide the same options to buy gold and silver.

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