Stories galore have been doing the rounds about China’s recent promotion of gold and silver investing to its general population. Mostly, these have focused on the sudden appearance of Chinese TV slots like this:
On Thursday we reported a rumour that China was considering banning exports of silver and gold. Earlier, we reported that Hong Kong was hauling home gold it owned in London’s gold depositories to start rival depositories of its own — to be used, by the way, to nurture a home-grown gold and silver retail fund industry.
So why all this sudden gold and silver bullion mania from China?
Commodity-focused blogger Gregor MacDonald offered an interesting view on Thursday. Unsurprisingly, it had a lot to do with China’s quest for dollar-reserve diversification (our emphasis):
It appears that China has decided to leverage the sheer scale of its own population, to effectively download the world’s gold and silver into a billion different hands. The ability to buy precious metals at one’s local bank, in small bar denominations, is the distribution channel. Some have suggested this policy may double as a way to dampen currency based inflation internally. If that’s the case, then the question remains whether the state will use Yuan, Dollars, or both Yuan and Dollars to carry the new inflows of metal, into the country. We await that particular answer.
The Gold Prices blog, meanwhile, added:
Against these totals, China has foreign reserves in excess of $2 trillion. In other words, more than enough to push the tiny gold market around in any way it wishes. Given that much of its reserves are now denominated in fragile U.S. dollars that it would sorely love to replace with something more tangible, and that China is the world’s largest gold producer, the country’s involvement with gold is something more than just a passing fancy.
Simply, there is a new gorilla in the room in global gold markets. The extent to which the broader market hasn’t yet figured this out is the extent to which you as an early mover can ultimately profit. Especially in the more leveraged gold stocks, which continue to be strong even as the broader markets show weakness.
And just to encourage the gold bugs a little further, here’s a report from the Sovereign Man blog explaining the extent and scope of China’s retail mania on the ground:
You can buy gold in China at any bank– even tiny banks in tier-3 cities sell gold. More importantly, however, the government is setting up official Chinese Mint stores all over the country. On the inside, they look like jewelry shops– armed guards, glass viewing cases, etc. But instead of diamond crusted earrings and white star sapphires, you see bars. Lots of bars.
The government mints bars in sizes ranging from 5 grams (which are so tiny they’re actually cute) to 1 kilogram. The prices are updated instantly– they have a Bloomberg screen which tracks the spot price, generally indexed to the Renminbi price in Shanghai rather than New York or London (another sign of Chinese financial independence). The bars are all serialized and 9999 purity, the same as you would get from Switzerland.
They are also certified by the gold exchange, which validates the quality. The premium runs 10 renminbi per gram, or roughly $30 (US) per ounce. We went into several stores and saw Chinese people buying like crazy… all with cash. The most popular denominations were 10 grams and 50 grams, as well as every piece of jewelry in sight. I’m surprised the mint shops didn’t sell out at the inventory was flying off the shelf.
Essentially what appears to have happened in China is a total relaxation of the rules governing the holding of precious metals by individuals — on a massive and sudden scale. As a report by Mineweb quoting Paul Mylchreest’s Thunder Road Report reminded us, this is a far cry from the situation just a few years ago when the distribution of gold and silver was strictly controlled. Interestingly too, the article also noted the following (our emphasis):
Paul ends the piece on Chinese gold and silver potential with the following comment: “Simply put, the Chinese government is trying to trigger a national gold craze…and it’s working. The Chinese public now has gold trading platforms on steroids…. …Also, for the first time in history, Chinese investors can even trade gold abroad (in London) with the swipe of a ‘Lucky Gold’ card. I can’t even get Bank of America to open a foreign currency account.”
In which case, it’s probably worth remembering what Chinese buying did to good old Shanghai composite price-to-earnings ratios back in 2007.
Related links:
Hong Kong hauls over the gold – FT Alphaville
Forget Treasuries, is copper the future for China? - FT Alphaville