China, Gold and The Coming Flood of Wealth

By: Julian D. W. Phillips | Mon, Apr 28, 2008
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I have just returned from a 10-day trip to Southern China and Hong Kong. While I was there, I explored the Chinese attitude toward gold. If their demand for gold equaled that of other nation's average individual holdings, then we would see their demand well into four figures. I wanted to know if the Chinese would really move towards gold in their portfolios.

Growth in China
The Chinese government has set its sites on an average of 10% growth per annum and is achieving that because it has the power to ensure that this happens. The full, synthesized Chinese economy is under the firm control of the government. Is this control feared and resented? From our observations we saw a people that liked to be regimented and in synch with the government, which is regarded as a 'big brother' bringing wealth, prosperity and support to a large and growing number of its population. It appeared that the inclination of the people is to forego individuality in favor of obedience to the government that has brought them out of poverty over the last 25 years and more.

In the midst of an urbanization program that is seeing 50 cities of 10 million people being built [to be completed by 2020 - and almost certainly going to happen] and an upliftment of the remaining rural poor of 400 million [no doubt they will benefit from higher prices for food in the coming months and years?], we found incredibly, almost no stress in the city we visited [Guanshou]. The willingness to work hard, to obey and to subject themselves to the government is a prime reason why their growth is so rapid. It appears that the main driving force is the financial empowerment of the people by the government.

Can you imagine going to the bank with a potential order for a product, a business plan and an offer of machinery on credit from the best machinery companies in Europe. You would be able to project that workers receive in the order of $500 a month, lower supervisors $1500 and management at $2500 a month. You would have no union problems, no environmental issues, and a workforce that works hard and capably for long hours. The potential margins you would enjoy would be higher than any achievable in the developed world. Loans would come from any bank in the world on that basis.

If you can undercut your competition's prices by 50 to 75% then you will do well and have the bank panting after you as well as foreign machinery sellers. The comment was made that the Japanese took 20 years to get their cars right, Korea 10 years; China should do it in the next 5 years. When they do, you can be sure that most foreign competition will have to offer far more than they do, to compete. Global manufacturing is moving to Asia with China in the lead!

The State of Investment Markets
At this young stage of the economy with business growing so fast, savings appear directed at increasing production and wealth and not in passing it to a fund for investment. The opportunities for developing wealth and industry are where the new wealthy are focused. Both the banking system and investment infrastructure need to be developed considerably further than at present before they will have as many mature markets as the developed world has at its fingertips and preceding that there needs to be 'excess wealth' available to investors over and above development needs.

The Chinese currency, the Yuan has not helped gold much either. The gold price in the Yuan has had to cope with a rising Yuan, which has appreciated 18% over the last year. As a result the gold price itself has not been a magnet for investors.

The nearest mature set of markets to China is to be found in Hong Kong, where we find the fifth largest financial market in the world. A look into the hordes of apartment blocks there showed selected light fittings with people dressed in true well-off western style. In Guanshou the apartments had only neon lighting and the people dressed well but not affluently. This reflects the state of the gold market.

We know then that although Chinese demand for gold is healthy and rapidly growing it is barely a trickle to what it will be in the future. We do believe that in the upper echelons of Chinese society, where the wealthy reside, there is a great interest in gold and in its investment value, but this group is not large or capable of demanding so much gold that it even begins to achieve the full potential of China's investment potential in gold.

Consequently it is not the emerging wealthy nations, but the gold merchants who are the targets. We talked to one of the main banks that was offering gold and silver to the public, but saw that this came in the form of 24-carat gold plated figurines and Olympic medals containing both gold and silver. Obviously, this is not a serious investment attitude toward precious metals.

"Chinese demand for gold will rise a river in flood!"

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Julian  D. W. Phillips

Author: Julian D. W. Phillips

Julian D. W. Phillips
Gold Forecaster

Julian D. W. Phillips

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price.

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