How Do the Chinese
View the Gold Market? Jeff Clark, Senior
Precious Metals Analyst on November 28, 2012 5:58pm GMT
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.