The Gold Bubble and China

Yippe-Ki-Ya · Oct 18, 2011

Gold doesn't pay interest.

It's doesn't have as many industry applications as silver.

And we spend years digging it up, only to put it back under the ground in a vault!

Gold doesn't make much sense when you look at it like that. So why would anyone of sound mind invest in gold, or gold stocks?

Simply because gold holds its value in good times and bad.

For all the talk of a bubble, gold ownership is still surprisingly rare.

The recent avalanche in Chinese gold demand makes it a good investment. In the last couple of years, the government has been pushing public ownership of gold.

The country was already the biggest producer of gold. But the increase in new buyers means now it's the biggest importer.

And annual imports increased fivefold to more than 209 tonnes last year. That's the same as 7.4 million ounces, which doesn't go very far across a population that size. The other big gold consumer is India. Together, gold purchases from China and India accounted for HALF of the world's annual gold production last year.

If Chinese demand keeps growing, it will quickly dominate the global gold market. China's thirst for the yellow metal could see the physical market dry up within years.

But even though prices are constantly setting new highs, global gold production is stuck in first gear. The industry produces no more today than it did 10 years ago.

Billions of Indian and Chinese buyers want more gold each year and the industry is unable to increase production: these are not the makings of a commodity that's price is coming down any time soon.

Gold bears like saying gold is in a bubble. It makes them feel better about not owning any yet. It's hard to see how gold is in a bubble when it still only makes up 0.6% of global financial assets - the same as it did 20 years ago.

The gold bears also like to say the gold price will fall if global interest rates start rising in coming years. But the gold price rose every year for the last 10 years regardless of where we were in the interest-rate cycle.

Simply put, China is demanding more gold than can be supplied. It's not a 'popping' sound you hear the metal making...

It's a 'cough and splutter' sound from the gold bears for not investing in gold soon enough.
Click to expand...

Alex Cowie
Editor, Diggers & Drillers

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The Gold Bubble and China

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