First with Financial Comment from Arabia

Chinese to buy even more gold in the Year of the Tiger

with one comment

China has only 1.6 per cent of its foreign currency reserves held in gold. But between 2003 and 2009 Chinese households bought almost 1,800 tonnes of the yellow metal, almost four times the purchases of the People’s Bank of China.

The Chinese Year of the Tiger which has just started is reckoned to be an auspicious year for gold purchases. Superstitions aside the listing of gold futures on the Shanghai Futures Exchange is also an encouraging development.

Bond buying falls

US treasury bond purchases by China are also falling: from half of new issuance in 2006 to 20 per cent in 2008 to an estimated five per cent last year. No wonder some international banks think bond yields will have to rise substantially this year.

Clearly the focus has been on stimulating the Chinese domestic market in 2009 with a stimulus in the first half equivalent to half of national GDP. But no other nation has a more immediate danger from surging inflation. Recent agricultural price rises are far more worrying than a surge in high-end residential property prices.

For China is a victim of its own successful stimulus. Money supply increases of 30 per cent have never been tried before on this scale. But less ambitious money supply boosts have almost always resulted in inflation in the past. China is no different.

It is therefore to be expected that the Chinese people will continue to buy the one money that will protect them against inflation in 2010, and last year China surpassed India as the world’s top private gold consumer. The logic of a currency whose supply cannot be expanded is clear for investors who are very wise to be worried about domestic inflation.

Biggest gold producer

Thankfully China is also the world’s biggest gold producer, ahead of South Africa and Australia, so the metal to supply this rising demand is available locally.

However, for gold prices this has to be good news in 2010. It may well be that a global stock market correction in the first half rallies the dollar to the detriment of gold prices. But this will be just another buying opportunity in this gold market.

You need buyers, of course, to make a market and there seem to be a lot of them in China right now.


Written by Peter Cooper

February 15, 2010 at 9:48 am

One Response

Subscribe to comments with RSS.

  1. Nice commentary, Peter!

    No doubt, the US stock market will undergo a severe correction sometime in 2010. When that occurs, gold and silver mining stocks will tumble, too; that will be a great time to buy these stocks.

    Additionally, we can all be assured that precious metals prices will also fall, and the US FED, aided by JPM & the GS subsidiary, will make sure gold and silver fall harder than they should . . . but that is also a great time to buy gold and silver, as you stated.

    So we need to keep some of our powder dry.


    February 15, 2010 at 8:39 pm

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: