How and Why China Will Flood the Gold Market
By Jeff Clark, Editor, Casey’s Gold & Resource Report
It is encouraging citizens to put at least 5% of their savings into precious metals.
This is why folks in China are lining up outside of banks, post offices, and the new official mint stores to buy gold and silver (they especially like silver because it’s cheaper per ounce).
The Chinese attitude toward gold and silver is a striking contrast to the American attitude right now. I don’t recall a TV or radio ad from my congressman or President Obama encouraging me to buy gold or silver. Does your bank sell silver bars? Are gold mints popping up in your neighborhood? Are any of your friends, family, or coworkers scrambling to buy precious metals?
In spite of a few ads on television and satellite radio, buying gold and silver in the U.S. is still largely seen as a fringe-group activity. That’s not the case in China. And in the big picture, there are three distinct trends occurring in China today that many in the Occidental world are not paying attention to.
First, look where China stands as a gold-producing nation.
Second, China had the lowest per-capita gold consumption of any country over the past half-century. This year, it is widely expected that Chinese demand for gold will surpass that of India. In other words, they’ll also become the world’s No. 1 retail buyer.
Third, the Chinese government has been using its foreign exchange reserves to buy gold – a lot of it – and doing so on the sly. This past April, Chinese officials made a surprise announcement that they had been secretly buying gold since 2003, increasing their gold reserves by 76% to 33,886,000 ounces. The Chinese government now owns 30 times the gold it held in 1990. And China is believed to be a leading candidate to buy some or all of the 12.9 million ounces the International Monetary Fund says it will sell.
But all this production and all this buying isn’t enough…
Even though China is the world’s seventh-largest holder of gold, gold comprises but a tiny fraction of its reserves, as shown in the table below.
At $1,000 gold, to push China’s gold holdings to 5% of reserves would take $55.3 billion; to 10% would cost $144.4 billion; to be the world’s top gold dog would run $227.6 billion.
Combining the country’s massive holdings of dollars and the very real likelihood those dollars are going to lose much of their value, the motivation to buy tangible assets is urgent.
Further, keep this in mind: China’s reserves continue to grow. Therefore, the country must continue buying gold (or consuming its own production) just to maintain the small gold-to-reserves ratio it has, let alone increase it.
In addition to the government buying precious metals, Chinese citizens will continue gobbling them up, too. Demographics alone tell us why.
Government statistics show the average urban household in China has about US$1,300 in disposable income. Multiply that by the number of urban households in China and you come up with roughly $36 billion in available capital.
According to precious metals consultancy CPM Group, about 9.5 million ounces of gold will be turned into coins this year (including "rounds" and medallions). At $1,000 gold, that’s $9.5 billion, or only about one-third of the capital available in China.
The number is more striking for silver: Total coin production this year is expected to hit 35 million ounces, equaling $615 million or just 1.7% of the available capital in China. Of course, a lot of Chinese people want cars and refrigerators, etc., but it won’t take much of a shift of this capital into gold and silver to have a major impact on the global retail precious metals market. It may already be under way.
If I were a crime detective, I’d say China has the motive, means, and opportunity to push gold and gold stocks much higher.