China's Gold Rush

by Tony D'Altorio

China's Gold Rush

by Tony D’Altorio, Investment U Research

Thursday, December 30, 2010

 

The United States has become an exporting nation once again. But this time, it’s exporting inflation thanks to Ben Bernanke and his QE1 and QE2.

The countries affected the most, naturally, are those pegged to the U.S. dollar. Like China.

 

A weakened dollar means pricier commodities across the board. And that inevitably means food and fuel prices going up as well.

Chinese government authorities have tackled rising inflation by raising interest rates twice already in the past few months. And they’ll likely have to hike them again in the new year.

 

If not, their other choice is elevating their currency value, something the U.S. government has wanted for a while. Funny how it works out that way…

Yet also ironic is how the Federal Reserve’s actions have unleashed other forces.

 

China's Inflation

With inflation on the rise in China, the Chinese have developed into huge gold bugs.

Sure, they always have enjoyed the shiny commodity. But China’s love affair with gold ended when the Communists took over in 1949.

The new rulers declared the metal bourgeois and assumed control of all gold mines. But now it has reemerged as a popular hedge against inflation and currency appreciation.

 

More than likely, the Fed didn’t intend for that to happen as it plotted and schemed.

Chinese inflation data for November showed prices up 5.1% from the previous year, the sharpest increase since July 2008. Much of that happened in the food sector, like the 60% hike in vegetable prices year-on-year.

 

Combined, rising inflation and low Chinese interest rates often turn bank deposit returns into the red in real terms. Chinese households keep about $2 trillion in such accounts, with few other options to store their cash.

Add to that falling real estate investments and a slump in the stock market – both due to government intervention – and mainstream China has few other options.

So gold products simply work best for them in the end.

 

Chinese Gold Imports

 

The U.S. government wants China to become a bigger importer. And it looks like they got their wish as Chinese gold imports soared in 2010.

Already the world’s biggest gold mining country, China has now turned into a major buyer. It imported over 209 metric tons of gold during the first ten months of the year… a fivefold increase from the estimated 45 metric tons in 2009.

 

And according to the World Gold Council, Chinese retail demand for the metal jumped 70% to 153.2 tons October 09’ - September ‘10 compared with the previous 12 months. Yet demand for gold jewelry rose just 8% during the same period to 373.6 tons.

 

This highlights gold’s increasing popularity as a hedge against inflation and economic uncertainties. China’s bullion bullishness is clearly having a big effect on global markets.

 

Its buying surge even threatens to upset India as the world’s largest gold consumer. Chinese demand in 2010 is expected at around 600 tons, just behind India’s 610.

Gold-linked investment products, or paper gold, are also multiplying in China. The government recently approved its first overseas, gold-backed ETFs.

Similarly, Hong Kong’s bullion exchange announced a gold contract denominated in renminbi, expected to launch in early 2011.

 

Gold Investments

 

China’s gold rush has to be making gold investors smile at this point.

Private Chinese gold demand has risen 26% annually by volume in the last decade. And between the Chinese government opening its gold market and the Fed’s inflation quest, this trend looks set to continue.

As Walter de Wet of Standard Bank in London said, “The trend is undeniable – gold demand in China is rising rapidly.”

 

U.S. investors don’t have to worry about missing out either. They can purchase gold coins, bullion or individual stocks such as Randgold Resources ADR (Nasdaq: GOLD).

 

Or there are always ETFs such as two from Van Eck: Market Vectors Gold Miners (NYSE: GDX) and Market Vectors Junior Gold Miners (NYSE: GDXJ).

 

If those don’t look good enough, some ETFs claim to be backed by gold bullion. That includes SPDR Gold Trust (NYSE: GLD) and ETFS Gold Trust (NYSE: SGOL).

 

With China renewing its centuries-old love affair with gold, these investments will put a shine on investors’ portfolios for some time to come.

 

Good investing,

 

Tony Daltorio

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