China goes on gold binge, as world wonders why

[saltwater]

Isnt this a damning report on China. What does it mean.Can one of you guys break it down. Thks.
No easy answer why the fifth largest holder of metal has increased purchases


By Gordon G. Chang

updated 1/31/2012 12:58:08 PM ET 2012-01-31T17:58:08


This month, the Hong Kong Census and Statistics Department reported that China imported 102,779 kilograms of gold from Hong Kong in November, an increase from October’s 86,299 kilograms. Beijing does not release gold trade figures, so for this and other reasons the Hong Kong numbers are considered the best indication of China’s gold imports.
Analysts believe China bought as much as 490 tons of gold in 2011, double the estimated 245 tons in 2010. “The thing that’s caught people’s minds is the massive increase in Chinese buying,” remarked Ross Norman of Sharps Pixley, a London gold brokerage, this month.
So who in China is buying all this gold?
Forbes.com: How much of the iPhone is ‘Made in China’?
The People’s Bank of China, the central bank, has been hinting that it is purchasing. “No asset is safe now,” said the PBOC’s Zhang Jianhua at the end of last month. “The only choice to hedge risks is to hold hard currency — gold.” He also said it was smart strategy to buy on market dips. Analysts naturally jumped on his comment as proof that China, the world’s fifth-largest holder of the metal, is in the market for more.
There are a few problems with this conclusion. First, the Chinese government rarely benefits others — and hurts itself — by telegraphing its short-term investment strategies.
Second, the central bank has less purchasing power these days. China’s foreign reserves declined in Q4 2011, falling $20.6 billion from Q3. The first quarterly outflow since 1998 was not large, but the trend was troubling. The reserves declined a stunning $92.7 billion in November and December.
Forbes.com: China is 175.6 percent dependent on the U.S.
Third, the purchase of gold would be especially risky for the central bank, which is already insolvent from a balance sheet point of view. The PBOC needs income-producing assets in order to meet its obligations on the debt incurred to buy foreign exchange, so the holding of gold only complicates its funding operations. This is not to say the bank never buys gold — it obviously does — but there are real constraints on its ability to purchase assets that do not provide current income.
Apart from China’s central bank, there is not much demand from the country’s institutional investors for gold. There are industrial users, of course, but their demand is filled from domestic production — China is the world’s largest gold producer. Most of China’s gold demand from foreign sources, therefore, is from individuals.

So why are individuals now buying gold? The easy answer is that the demand is only seasonal, as Jeff Wright of Global Hunter Securities believes. The Chinese traditionally buy gold presents in the run-up to the Lunar New Year, which started a week ago. Yet gift-giving does not begin to explain the surge in gold purchases that started as far back as July. November was the fifth-consecutive month of China’s record gold purchases from Hong Kong.
Forbes.com: Apple could sell 40 million iPhones in China in 2013
A better explanation for the gold-buying binge of Chinese citizens is that they are using the shiny commodity as an inflation hedge, as the Financial Times recently suggested. Yet the buying of gold has increased while inflation has eased. And that means there must be another explanation. The best explanation is that individuals in China are using gold as a substitute for capital flight.

Although indicators showed the Chinese economy faltered only at the end of September, there had been a growing sense of pessimism inside the country for months before then. Beijing, after all, could build only so many “ghost cities” before citizens began to notice. As Joseph Sternberg of the Wall Street Journal Asia said on the John Batchelor Show last Wednesday, “people inside China seem to be losing faith in the Chinese growth story that we’ve been hearing so much about for the past few years.” Estimates of capital flight are sketchy, but it appears there was $34 billion of it in the third quarter of last year and a $100 billion in the fourth.
Not every Chinese citizen is in the position to export cash, so the next best tactic for the nervous is to buy gold, a refuge from plunging property prices and declining stock markets as well as an anticipated depreciation of their currency. “Within China,” notes Michael Pettis of Peking University, “many are going to argue that the rapid decline in the trade surplus, coupled with unmistakable evidence of flight capital, means that the PBOC should devalue the RMB.” And the fact that China’s leaders in public are talking about the adverse impact of the European crisis on China weighs heavily on sentiment.
Forbes.com: Is the People's Bank of China insolvent?
The worst thing about capital flight and gold purchases is that they drain liquidity out of the Chinese economy just when it is needed most. Beijing can continue to work its magic as long as strict capital controls keep money inside the country. Once they fail to do so, however, all bets are off. The purchasing of gold, of course, results in the exporting of cash.
Chinese asset values have not yet crashed across the board, but the buying of gold — a leading indicator of panic — is an especially troubling sign that they will. Therefore, it is not surprising that gold purchases by Chinese citizens and investors are frightening Beijing’s technocrats. At the end of last month, they shut all of the countries gold exchanges other than two of them in Shanghai.
http://www.msnbc.msn.com/id/46205510...orld_business/

[miktay]

Thiz iz not news. China's been accumulating gold for some time. ChIna has now surpassed India as the largest country buyer of gold.

The. Chinese gubmint wuz spooked after US gubmint downgrade in aug 2011. Gold has not traded below 1500 since Aug 2011.

China holds trillions of US gubmint securities. She seeks to diversify away from these assets but there are few viable options. Gold iz one viable option. But gold does not pay a dividend.

Chinese citizens also seek gold. The yuan iz being debased by the mercantilistic trade policies of the Chinese gubmint.. Inflation and easy credit have made food expensive. Chinese farmers riot over rising prices.

[saltwater]

Thks Miktay...what does this mean, why is there capital flight if the things are nice and rosy in China.

The best explanation is that individuals in China are using gold as a substitute for capital flight.

[miktay]

Thks Miktay...what does this mean, why is there capital flight if the things are nice and rosy in China.

Things are not nice and rosy 4 the average Chinese person.

Chinese citizens who have the means have long established alternate residence elsewhere.

Capital flight (read: gold purchases) iz as a result of Chinese citizens distrust of their corrupt gubmint officials, the contracting Chinese economy, the property bust and rising domestic inflation.

People buy gold when they are apprehensive about the future.

Domestic Chinese citizens are very apprehensive about the future.

China's gubmint has pursued the same failing Keynesian economic policies as the US, Europe and most of Asia.

And az chickens come home 2 roost there iza price to pay 4 following bad advice.

[saltwater]

What do you think will happen the China's exports in the future.

[Redman]

The exports are dependent on demand from euro and us consumers.

Also wages are starting to climb in china and they are actually losing biz to the satellite countries that are able to undercut chinese cost of production.

Some of the fall off in demand is going to be picked up out of Latin America as they begin to assert themselves.


And I think the reason that the Chinese are buying gold is simple.

They think it's cheap now.

With the unresolved currency and debt issues I can't say I disagree.


Later

[miktay]

What do you think will happen the China's exports in the future.

Chinese exports show imminent signs of contraction.

A couple indicators point 2 thiz.

Chinese manfaturing iz contracting.

A Chinese purchasing managers’ index signaled manufacturing may contract for a third month as a slowing economy boosts the case for the government to further loosen credit controls.

The preliminary January reading of 48.8 for the gauge, released by HSBC Holdings Plc and Markit Economics today, compares with a final 48.7 number for December. The dividing line between contraction and expansion is 50.

International Monetary Fund Managing Director Christine Lagarde joined global officials today in warning that the world economy is decelerating and faces “significant and urgent challenges.” China has allowed its five biggest banks to boost first-quarter lending and may relax capital requirements, people with knowledge of the matter said.

http://www.bloomberg.com/news/2012-01-20/china-manufacturing-may-contract-for-third-month.html

The Baltic Dry Index...a key measure of ocean freight rates (read: the demand 4 commodities)...iz dropping like a rock.

http://www.bloomberg.com/apps/quote?ticker=BDIY:IND

[saltwater]

I hv read that some US businesses are moving back to the US because it is cheaper to produce in the US because of this same reason.

Also wages are starting to climb in china and they are actually losing biz to the satellite countries that are able to undercut chinese cost of production.

And in Obama's Sate of Union speech he said the US should be giving incentives to the business who want to come back. This brings up a related question.
Is the Chinese worker more productive than the US worker.

Another pt...what will happen (to China) if you are wrong on gold.

And I think the reason that the Chinese are buying gold is simple.

They think it's cheap now.

[saltwater]

Chinese exports show imminent signs of contraction.

A couple indicators point 2 thiz.

Chinese manfaturing iz contracting.


http://www.bloomberg.com/news/2012-0...ird-month.html

The Baltic Dry Index...a key measure of ocean freight rates (read: the demand 4 commodities)...iz dropping like a rock.

http://www.bloomberg.com/apps/quote?ticker=BDIY:IND

Thks for the info Miktay.

[Redman]

I hv read that some US businesses are moving back to the US because it is cheaper to produce in the US because of this same reason.

And in Obama's Sate of Union speech he said the US should be giving incentives to the business who want to come back. This brings up a related question.
Is the Chinese worker more productive than the US worker.

Another pt...what will happen (to China) if you are wrong on gold.

Well THEY think its cheap now I did not give my opinion on Gold prices.

And if they are wrong they will lose money.

That being said-I cant see that Gold prices heading south for a while-

Historically it acts as a safe haven in times of uncertainty-The one thing we can be CERTAIN about is the multitude of issues that make the future direction uncertain-Geoploitical,financial,economic,environmental etc etc etc.

The absolute increase in Global Money supply means that there is more money floating around and this is usually inflationary to commodity prices.


The relative size of the Gold market means that the demand for instruments/bullion/futures will be high as it becomes acceptable to allocate a % of your portfolio to commodities and specifically Gold.

On the more esoteric side-The last 10 years has seen a shift-from paper assets to hard assets-there is now more awareness that food,water, and other natural resources cannot be created-and therefore are limited while demand is growing.
However since the prices of commodities have been high-there has been a massive transfer of wealth as the consuming countries buy the hard assets.
With this has come the loss of economic dominance to the Middle and Far East and control over large chunks of international commerce.The USD is now in the cross hairs and India China and LATAM are making direct linkages and cutting out the use of the USD as a medium of exchange.So regional exchanges and price points will continue to expand and the USD will be come less relevant.
As this becomes more prevalent the demand for USd as a medium of exchange will reduce-as will the perceived value.Therefore the nominal price of commodities will reset higher to counteract the loss of value.

So unless the above issues are solved I would bet that Commodity prices move higher.

In fact I am betting on it.


Later

[oecarb]

In my thread #160, Pg 7 on the thread Six Weeks to Save the Euro Sept 2011, I posted the following:

While many investors have been distracted by the goings on in Europe, China has been making a dent in the global gold market by making it easier for investors to buy and invest in the yellow metal.

The goal: To dominate the global gold market and carve out a new role for its currency, the yuan.

China and other developing nations like India have been encouraging citizens to buy and hold physical gold, in forms ranging from jewelry and coins to bullion bars. China's aggressive promotion has pushed Chinese consumer demand for gold up 25% overall this year - much higher than the 7% global average.

World Gold Council (WGC) Far East Managing Director Albert Cheng, who predicted in March 2010 that Chinese gold demand would double by 2020, noted: "We now believe this doubling may, in fact, be achieved far sooner."

China is pushing gold because it wants the government and citizens to build financial reserves in assets stronger than the U.S. dollar, euro, and other weakening currencies. It also increases China's role in the precious metals market.

But there's another effect of this push for gold ownership: it's dislodging the dollar as the world's main reserve currency..........

..........China plans to open the Pan Asia Gold Exchange (PAGE) in June 2012. PAGE will feature a market-driven pricing system and offer both physical gold purchases, including distribution or storage, and derivative products based on physical gold.

It will be open to anyone, either directly or through an agreement with The Agricultural Bank of China (ABC). Customer information for the exchange and the bank will be fully integrated, giving PAGE direct access to the accounts of 320 million retail customers and 2.7 million corporate clients in roughly 24,000 branches. The partnership makes gold buying incredibly easy for customers, who will be able to buy gold and silver online, with payment coming right out of their bank accounts.

Analysts expect the impact of this arrangement to be enormous, perhaps even changing the way global gold prices are established.

Currently, the futures market in London - overseen by the London Bullion Market Association (LBMA) - "fixes" the spot price of gold each morning and afternoon, based on trading action in London and on America's COMEX market. However, the LBMA and COMEX contracts are backed by just 10% of face value in physical gold, while the PAGE derivatives will be backed by a much larger percentage - meaning trading volume there could change worldwide supply-and-demand dynamics for the yellow metal.

This means the focus of global gold trading could shift quickly to China, where ABC and five other major Chinese banks will fix the gold price each morning at 8 a.m. local time - well ahead of the opening of European and U.S. metals markets.

If the link between PAGE and ABC accounts is a success, other small Chinese banks are already poised to offer over-the-counter (literally) and online gold sales to their customers.

This will push up prices as consumer demand climbs even higher. And, since the price fix will be in yuan, the currency will gain significant international legitimacy as a result.

http://moneymorning.com/2011/11/22/c...l-gold-market/

[miktay]

In today's world we have increasing economic and political uncertainty with no clear solutions.

All signs that point to likely future increases in the medium to long term price of gold.

[saltwater]

Well THEY think its cheap now I did not give my opinion on Gold prices.

And if they are wrong they will lose money.

That being said-I cant see that Gold prices heading south for a while-

Historically it acts as a safe haven in times of uncertainty-The one thing we can be CERTAIN about is the multitude of issues that make the future direction uncertain-Geoploitical,financial,economic,environmental etc etc etc.

The absolute increase in Global Money supply means that there is more money floating around and this is usually inflationary to commodity prices.


The relative size of the Gold market means that the demand for instruments/bullion/futures will be high as it becomes acceptable to allocate a % of your portfolio to commodities and specifically Gold.

On the more esoteric side-The last 10 years has seen a shift-from paper assets to hard assets-there is now more awareness that food,water, and other natural resources cannot be created-and therefore are limited while demand is growing.
However since the prices of commodities have been high-there has been a massive transfer of wealth as the consuming countries buy the hard assets.
With this has come the loss of economic dominance to the Middle and Far East and control over large chunks of international commerce.The USD is now in the cross hairs and India China and LATAM are making direct linkages and cutting out the use of the USD as a medium of exchange.So regional exchanges and price points will continue to expand and the USD will be come less relevant.
As this becomes more prevalent the demand for USd as a medium of exchange will reduce-as will the perceived value.Therefore the nominal price of commodities will reset higher to counteract the loss of value.

So unless the above issues are solved I would bet that Commodity prices move higher.

In fact I am betting on it.


Later

Thks for the simplified analysis Redman.
You forgot to answer this question

Is the Chinese worker more productive than the US worker.

[saltwater]

In my thread #160, Pg 7 on the thread Six Weeks to Save the Euro Sept 2011, I posted the following:

Thks for the info onecarb.... its getting clearer now.

[miktay]

Is the Chinese worker more productive than the US worker.

Depends on who u ask....

Labor in the northeast US iz highly unionized...but getting less so.

US unions are loosing political support.

Chinese factories have the ' support' of the state.

Chinese factories can scale up and down easier than their US counterparts

But working conditions in China are different to the US.


http://www.youtube.com/watch?v=V3YFGixp9Jw&feature=youtube_gdata_player

[Redman]

I would also add that it can't be an easy comparison because of the different conditions would skew different aspects of the equation.

And the Chinese govt will continue to encourage private gold purchase-what better way to sequester currency?
They fighting inflation.

So comrade buy all the gold you want. If PRC needs it we shoot a few people and badaboom badabing we confiscate all privately held gold in china.

What's that ?
You thought communism was dead?

Well in that case stand by that wall and here's the invoice for your bullet.

Later

[saltwater]

This hv nothing to do with China binging on gold...but very interesting info which I found while reading an article on funds not to invest in for 2012.

Hitting the wall
The casual 401k investor might assume that, as the global economy crawls out of the worst recession in decades, China at least provides investors with a red-hot market.
After all, China's gross domestic product is growing at an annual pace of about 9%, significantly higher than GDP in the United States or Europe. And Western companies from McDonald's (MCD) to General Motors (GM) are betting big on China's emerging middle class.
So how come the Dreyfus Greater China (DPCAX) fund is off more than 30% in the past year? And why is it that other emerging-market funds with a China emphasis have also flopped?
It's because of fears about a "hard landing" in China.

Wall Street worries about what will happen to the export giant if its currency continues to strengthen. Also, there are hints of a housing bubble in China, with reports of high-rise ghost towns with no residential tenants in the condos and no businesses in the office spaces. Then there's the concern about any data we are given from China's notoriously opaque government.

The bottom line is that it is extremely difficult to transition from a hyper-growth emerging market to a slower-growth developed economy. And many fear China will hit a wall -- if not this year, then soon.

That makes Dreyfus Greater China and all other China-focused funds very risky bets for your retirement.
http://money.msn.com/mutual-fund/5-f...-your-nest-egg