Thursday, December 16, 2010

Inflation Fears : Chinese Rush to Gold

Indications from China suggest that the surge in gold buying, which has already led to the country's imports rising dramatically, is turning into a rush.
While recent statistics show that China's gold imports have risen dramatically this year, despite China itself being the world's largest gold producer with mine production still rising to, anecdotal evidence suggests that this may just be the tip of the iceberg as Chinese people are, apparently, rushing to buy gold as an inflation hedge.
A report in the Financial Times suggests that gold purchasing by individuals is turning into such a rush - and the rising price, if anything, is - contrary to Indian experience - fuelling the intensity of gold demand there.  With the ever-rising growth in the numbers of middle-income Chinese as the country's wealth drips down to the people, this source of gold demand is becoming increasingly relevant to the global market.  China is expected to surpass India as the world's leading gold purchaser within the next few years and with the kind of surge in popularity of gold bars and coins, rather than jewellery, there this could even take place sooner rather than later.


  1. The Chinese with savings for their old age cannot preserve value by depositing their YUAN money in banks as with growing inflation the bank interest and bond rates paid are much lower than the inflation rate .
    They are then forced to turn to speculating in buying share and property title markets .
    The great influx of money into these markets is creating bubbles. That is , an overvaluation of the prices of these assets that cannot possibly deliver the future returns promised .On the crazy Chinese capitalism property bubble see:
    Worse than the speculation driven property bubbles in US capitalism ?

    The “smart” money can see the writing on the walls of overvalued properties and turn to gold as a store of value and possible speculative gains.This will add a huge demand for gold.
    What will happen to the world price of gold?
    What are the central banks of China and Russia up to as fiat printed money like the US dollar is losing its dominant reserve currency status as the old world standard of value in trade and finance and therefore its dollar hegemony role as its value is being fast inflated away by money printing.
    As is well known the Chinese and Russia are limiting their purchases of US government Debts –Treasury bills denominated in dollars and the old Fannie and Freddy property bonds had to be nationalized by the US and their dividends value is now ‘guaranteed” by the government printing press !!!
    “Classical” economic theory from Adam Smith ,thru Ricardo to Marx asserted a labor theory of value. Marx for example was living in an age of gold backed currencies and not only analyzed the movement of capital in modern economies but refined in chapter one of Capital the basis of his work the theories of Ricardo in determining an improved(?) theory and concept of value and the role of money including gold.

    The bankers of China and Russia were trained in this Marxist theory of value, “ Socially necessary labor time” created value and their world views on the value of gold are still influenced by those theories.
    The Chinese government encouragement for their people to by gold as a store of value will now create a huge influence on world demand ,this is bound to effect the price of gold as more money competes for physical gold .See for example a Russian central bankers comment on GATA central bankers of china may have similar views.
    Russia's Central Bank Takes Note of GATA and Gold Price Manipulation

    The price of physical /real gold depends in US dollar terms in the short term on speculation on fluctuations in supply and demand but the bottom line around what the price/value will eventually average out at depends on its cost of production and an average profit for those who can deliver. Complicating this averaging out process, is the role of central banks in trying to manage the competitive values of their currencies and futures market bets by big players manipulating the markets.
    The big dominant central bank players claim to still have large physical gold reserve stocks ,but a lot of these gold stocks may be leased out to derivatives players in a variety of traditional for bankers, fractional reserve banking.

    These central Bankers like the privately owned US Fed ,the Bank of international settlement BIS ,the IMF etc operate any scams in secret and resist any gold audits .
    So nobody really knows what physical gold they actually own.
    GATA and others assert that the central banks and big derivative players internationally conspire to manipulate and suppress the true market price of gold .
    See for example . Alasdair Macleod: Are the central banks running a fractional gold system?

  2. Only 200 bucks an ounce?
    That Russian central banker above ,after considering the cost of production ,the influence of supply and demand etc estimates the current value of gold as only about $200 an ounce.
    “So I do not even dare shed light on the methodology of gold price forecasting, but would like to risk outlining basic factors, which are permanently (and I stress "permanently") acting on the market. There are four of them -- two relating to the raw material properties of gold and two to its monetary qualities.
    As an economist educated in the Marxist school, I believe that the base for gold prices is rooted in the sphere of the real economy. Like any mineral raw material, mined gold has its intrinsic value. This value fluctuates quite significantly depending on the location, time, and technology of extraction. The market averages out the individual expenses, optimising them at a level that is acceptable to the industry that uses the metal in its production. The absolute values in monetary terms for this factor fluctuate, although they are the least mobile element of the price.
    The production cost category has its own "floor and ceiling." The technological particularities of gold extraction determine the minimum price level at which production is economically feasible in the industry as a whole. We think that the worldwide level is currently about US$200 per ounce. This is the minimum price limit. With lower prices the industry will plunge into a zone of catastrophe. So the average costs of gold production in volumes sufficient to satisfy expected market demand (over the past 15 years this has averaged 2,500 tonnes with the upward trend) are the first factor…
    Actually I think a Marxist would believe that gold ,a natural resourse ,has no “intrinsic” value only a replacement cost.
    As only the value of the labor time expended in its mining smelting and its distribution costs +an average rate of profit return on any capital invested .


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