“Gold is a commodity that combines the attributes of a currency, financial commodity and general commodity. Despite the declining function of gold as currency in the world, the activeness and development of investment activities with gold as the target indicates that gold still has a strong financial nature and remains an indispensable investment tool. In major financial centers in the world, the gold market, together with the money market, securities market and FX market, constitutes the main part of the financial market.”
- Dr. Zhou Xiaochuan, Governor of the People’s Bank of China, writing in the Alchemist (issue 36, 2004)

Fresh winds of optimism for gold and silver investors are blowing from China. For about a month now, the Chinese state television has been openly promoting gold and silver as an investment and a store of wealth. Not long ago, the Chinese announced that they had been “secretly” buying gold – starting from 2003 they had bought over 600 metric tons of gold, bringing the gold to cash reserve ratio from 1.3% to 1.7%. Of course, the Chinese are awfully good at smoke and mirrors and so it is not clear whether the numbers that were published back in spring are the real numbers. The real gold purchases could in theory be much greater than the Chinese officials are publicly admitting, especially as the free export and import of gold (and silver) is not allowed in China. There is no way to confirm the numbers because the Chinese central bank has been buying locally mined gold only. What is interesting is that China is the biggest gold miner in the world, overtaking South Africa who was the world leader for over a century as China’s gold production reached 270 (metric) tonnes in 2007. As the export of gold from China is very difficult and the industrial demand for gold very limited inside China, the most likely buyers are the People’s Bank of China, Chinese sovereign wealth funds and to a small degree the Chinese public.

Silver will be bigger than gold

What’s more interesting than that gold story, is of course the silver story.  Silver is an industrial as well as a monetary metal, but it’s price hasn’t really reflected the monetary aspect until about a few years ago. The recent shortage of silver bullion coins and bars is one sign that people have realized the monetary value of silver. After all silver is much like gold, only cheaper in today’s money. It is also less plentiful which means that any jump in demand will have an explosive effect of the price of silver. With the Chinese state television announcing silver bullion as an investment vehicle for the masses there is no doubt in my mind that silver has regained recognition as money and is headed for much larger gains than the 100% rise from the bottom in March.

Of course, the Chinese don’t need the government to tell them where they should put their money. The Chinese are not stupid, they have lived through the communist “industrial revolution”, a cultural revolution and many more repressive events in recent history which have brought death, misery and starvation. History has taught them that for immediate needs and expenses, cash is king but long term savings are best kept in gold, silver or other valuables that cannot be debased by the government or any other organization, for that matter. For thousands of years the Chinese have used silver coins as money and the Chinese still recognize the monetary role of silver.

But the recent ads on China’s state television is a clear sign that China wants the people to put their money away in safe assets. Whether this is to decrease the amount of money available for banks to avoid the formation of an investment bubble, to safeguard the populace cumulative inflation, which wipes out savings in any economy that is growing as fast as China or to prepare the people for a major crisis is really not important from an investment point of view. It could be another, seemingly irrelevant reason but for all we know from information out there is that gold and silver are going to be in very high demand over the coming years.

So what effect would the Chinese populace have on the precious metals? Well, for starters, there are 1,345 million Chinese, which means that even if they started* buying gold and silver in tiny amounts, the prices of the two precious metals would surge dramatically (*started is really not and adequate word here as the Chinese have been buying gold and silver for decades, I used it for illustrative purposes). But what if every Chinese were to buy one ounce of pure silver and one ounce of pure gold per person? Well, they would gobble up two years worth of annual silver mine production and a staggering 17 years worth of gold production, and that’s without taking into account the fact that gold production has fallen around 9% since its peak in 2001. Let’s not forget that the Chinese aren’t the only ones buying gold. One of the telltale signs of a major move back to gold is that the Germans have been installing gold coin vending machines all over Germany’s train stations. If there ever was a clear market call for gold and silver then this is it.

It is not wise to fight large numbers. A 1.3 billion strong market mover is not something you would want to miss, much less stand in the way of. The price of gold usually reflects trust in the government and the fiat currencies and clearly trust is not on the upswing, especially if an increasing number of Chinese government officials are publicly announcing their lack of trust in the dollar. The world hasn’t yet seen a time when hundreds of millions of people are scared of losing their savings, thus buying gold and silver. Since the last spectacular moves in gold and silver the amount of available gold has increased only by a tiny amount and silver supplies have actually decreased. But the world population is much bigger; imagine what this uncontrollable force will do to the price of gold and silver when it’s determined to buy it at whatever cost. It will be a mania. If you don’t own physical gold, it’s time to buy some.

Additional reading:
Hong Kong recalls gold reserves, touts high-security vault (MarketWatch)
China pushes silver and gold investment to the masses (Mineweb)
China’s Gold Production
World Gold Demand
Must see: China encourages Silver Bullion for investment

Related Posts

• China Issued Covert Insurance on Gold and Silver (0)
• Gold Investors, Stay Calm – Here’s Why (0)
• Real Life Example of Inflation (0)
• As the Dollar Declines, Foreign Central Banks Are Hitting the Panic Button (0)
• Junior Miners’ ETF Out Soon (0)