Thursday, November 29, 2012

How do the Chinese view the Gold Market?

Great article yesterday by Jeff Clark of Casey Research titled: "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 (click on image to enlarge).

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 duringAmerican 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.


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  1. Western people are so dumbed down at this point, your typical chinese farmer is infinitely more astute economically than a western business person who thinks a piece of paper is worth more than gold.

  2. If you think that high inflation is coming, wouldnt it be a good thing to own a home and have a long term sub 4% mortgage?

  3. EinsatzgruppenVancouverDecember 1, 2012 at 4:01 AM

    Seriously, village_whisper, now you're pushing the goldbug Ron Paul idea?

    When is gold a good buy? When inflation is large. Well, let me be the first to assert that nobody understands why inflation happens. Full stop.

    That said, there's tons of people claiming that just any day now, hyperinflation is gonna take off. Well, ok, if that were the case, then gold would be a good buy. It's a great hedge against inflation. But what if uh, actually, what's about a gajillion times more likely is _deflation_? The economic problems we've seen since 2008 have a whole lot more in common with the 1930s than they do with the double-digit inflation of the early 1980s. Gold isn't just "not a good buy" (at least north of $1000/oz), it's like, the opposite of that. You don't just wanna sell your gold, if gold was a stock, I'd short it.

    This site spends a lot of time talking about how bubbles are self-sustaining. What's a bubble? Hmmmm... Maybe when something gets 2 or 3 standard deviations above it's historical norms. So why is gold different from real estate? Maybe, just like real estate, the reason gold is so high is because there's fuck-all else around in the way of things to invest in?

    Well, what's the bloody difference between buying gold at north of $1500/oz and buying a 900 square foot house in surrey for $600,000? I worked in a pawn shop in the late 90s, and I spent an awful lot of time dealing with pissed off customers who couldn't believe that their gold was worth less than $300/oz.

    Good god in heaven. The primary thesis of this blog is "real estate has tripled since 1998 in vancouver, therefore, it's a bubble." which I think is actually a very sound argument. Well, if real estate had done what gold has done since 1999, a 2000 square foot place west of cambie and north of 41st ave would be going for six million dollars.

    But yeah, sure, buy gold. Chinese farmers in butt-fuck-nowhere do it, must be a good idea.