Great Depression Online Archive Issue:

How and Why China Will Flood the Gold Market

Great Depression Online
Long Beach, CA
November 27, 2009

Inside This Issue You Will Discover…

*** Taking the Cake
*** Epic Distortions
*** How and Why China Will Flood the Gold Market
*** And More

Taking the Cake

We look at the absurdities in the economy with a stupefied grimace.  With a wide eyed gape we pinch ourselves to know it’s real.  We can hardly believe our eyes.  For all around us, the collective delusions of man have made an utter mess of things.  What’s more, governments are goading them to further their blunders.

Of the many follies of our time, U.S. trade and capital flows with China take the cake.  On Tuesday the Washington Post summed it up…

“China has achieved its economic miracle through exports -- producing far more than its people consume.  The United States -- where consumers have driven 70 percent of the economy in recent years -- is its biggest market.  The United States, in fact, consumed more than it produced, but China enabled this by accumulating $2.3 trillion in reserves and plowing much of it back into U.S. government bonds.

~~~~~~Profit from the Crisis~~~~~~

Gold’s “Slingshot” Effect – When Gold Goes Up, Gold Stocks Soar.  Since the big market crash in October 2008 – when the Dow and S&P indices each collapsed by more than 40% – my subscribers have watched their gold stocks soar.  Kinross is up 189%...Lihir has jumped 180%...Minefinders surged up 173%...Randgold shot up 211%...and Royal Gold is up 108%.  All in less than one year.

These are the kinds of gains that put a smile on your face.  And once the Mania stage hits, you could be wearing a permanent grin.

Gold’s “Slingshot” Effect

~~~~~~~~~~~~~~~~~~~~~~~~~

“When the global boom went bust, the United States cut interest rates to zero and began running a fiscal deficit of 10 percent of gross domestic product.  This made the dollar vastly cheaper, but China, to protect its export industries, has responded by linking its currency to the plunging buck. Thus, U.S. exports are not growing as much as they would otherwise, and neither are those of other countries in Asia.  China, meanwhile, evinces anxiety about its dollar-denominated assets, and U.S. leaders try to deal with having a distant, militarily powerful and authoritarian state as their banker.

“Economically, the solution is obvious.  China must increasingly grow by producing to meet domestic demand; the United States must live within its means.”

Epic Distortions

Yet, while the solution may be obvious, we don’t suppose it’ll come about through any simple order.  Indeed, the length and breadth of their symbiotic disharmony will only be fully appreciated when its ultimate destruction upon the economy is realized.

But it’s not all sour grapes around here.  Times of crisis are times of greatest opportunity.  And now is just one of those times.  With a little imagination it’s quite possible to conclude that China will one day stop plowing the bulk of its dollar reserves back into U.S. government bonds.  In fact, they’re already commencing what could be a massive gold buying spree.

Here we find another absurdity: China’s dollar reserves vastly out dwarf the planets gold.

Thus, with a little imagination and strategic action, one could protect their wealth and, perhaps, make a fortune as the U.S. China trade absurdity reaches epic distortions.

For all the details on this rare opportunity, and how to capitalize on it, we bring you a guest essay from our friend Jeff Clark, Editor, Casey’s Gold & Resource Report. 

Enjoy,

M.N. Gordon
Great Depression Online

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How and Why China Will Flood the Gold Market
By Jeff Clark, Editor, Casey’s Gold & Resource Report 

As you read this, the Chinese government is doing an extraordinary thing…something nearly unheard of in the modern world.

It is encouraging citizens to put at least 5% of their savings into precious metals.

The Chinese government is telling people gold and silver are good investments that will safeguard their wealth.  After last year’s meltdown in the stock market, people believe it.  After all, Chinese citizens don’t receive government retirement money…and they don’t have company pension plans like people in many other countries do.

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.

In 2008, China produced 9,070,000 ounces of gold, exceeding all other countries.  Further, its production continues to rise, while many of the top-producing countries are in decline.

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 [1.9 percent] of its reserves.

What would happen to the gold price if China increased its gold reserves to just 5%?  What about 10%?  To overtake the U.S. as king of the gold hill, it would have to buy all the gold held by the governments of France, Italy, and Germany combined. Can China really do any of that?

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.

Chinese reserves are approaching $2.3 trillion, of which almost 70%, or $1.6 trillion, are denominated in U.S. dollars.  The cost to become the world’s biggest holder of gold would be a pittance compared to the amount of money China has available.  In other words, money is not a problem.

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.

And long-term projections show the demographic trend won’t slow down: The middle class in China is expected to increase by 70% by 2020.  So over these next 10 years, more Chinese and more money will be coming into the precious-metals markets, all at a time when inflation is almost certain to be high, adding to gold and silver's appeal.  Couple this with China’s long-standing cultural affinity for gold and you have the makings for a potentially life-changing gold rush.

If I were a crime detective, I’d say China has the motive, means, and opportunity to push gold and gold stocks much higher.

Sincerely,

Jeff Clark, Editor
Casey’s Gold & Resource Report

P.S.  If you’re interested in taking a stake in China’s booming silver market, make sure to read the latest edition of Casey's Gold & Resource Report.  Jeff has turned up a small company poised to become one of the dominant mining companies in China.  This company is sitting on an incredibly rich silver property…it’s heavily owned by its blue-chip management.  It’s the one stock to own if China goes “silver crazy.”  You can learn about this and all other stocks recommended in Casey’s Gold & Resource Report for just $39 per year. Try it risk-free for 3 months Here.

 

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