Buying China? Buy Gold

By: Adrian Ash | Wed, Mar 31, 2010
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Wanted to buy China's growth story but didn't know how...?

The WORLD GOLD COUNCIL'S excellent new 74-page report on Chinese gold demand - Gold in the Year of the Tiger - contains many graphics, tables and charts.

Time-pressed investors should focus on just two...

Historical Correlation of Daily Returns, 5-Years Ending December 2009: USDEUR, S&P500;, NIKKEI, Dow Jones, MSCI World, FTSE, DJ AIG Commodity Index, CRY Index, Aluminum, Hang Seng, S&P GSCI, Copper, Oil, Shanghai Composite, Platinum, Shenzhen Composite, CRB Index, Silver and Gold

"Gold has a low-to-negative correlation with mainstream financial assets," reports Eily Ong, author of the PDF FileWGC's report.

But note how the chart splits in two. And note where mainland China's domestic stock markets sit.

Over the last 5 years - and correlated against the Shenzhen and Shanghai stock markets - gold has in fact been more tightly linked with the "China story" than with either crude oil or the GSCI commodities index.

Put another way, if you've wanted to buy China, buying gold would have got you a good way there, and with lower volatility than other proxies such as Hong Kong's Hang Seng index, too.

Gold in Yuan/Ounce and M2 Money Supply in China

The second notable chart shows pretty much the only thing to have risen faster than the gold price in Yuan since the start of 2005 - the money supply.

Over the last year, China's GDP rose by perhaps 12%. Yuan gold prices have added 15%. Helping to fuel them, China's M2 money supply rose well excess of them both, swelling by 26%.

"Today, China's gold market is enjoying the benefits of liberalization and deregulation," writes Ong. But more than lower dealing costs and reduced import tariffs, gold is benefiting from rapid growth in the volume of cash and bank deposits.

Yes, the People's Bank of China has repeatedly warned that it will tighten monetary policy to curb inflation and stem banking lending. But the Yuan's Dollar peg effectively imports US monetary policy, imposing sub-zero real interest rates on Chinese as well as US households.

So both US savers, and their wealth-hoarding counterparts across the Pacific, are thus likely to seek inflation-beating returns outside "risk-free" cash now that "risk-free" means a guaranteed loss. Rare, tightly supplied gold looks a clear choice in China to date.

 


 

Adrian Ash

Author: Adrian Ash

Adrian Ash
BullionVault.com

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK's leading financial advisory for private investors, Adrian Ash is the head of research at BullionVault, where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

About BullionVault

BullionVault is the secure, low-cost gold and silver exchange for private investors. It enables you to buy and sell professional-grade bullion at live prices online, storing your physical property in market-accredited, non-bank vaults in London, New York and Zurich.

By February 2011, less than six years after launch, more than 21,000 people from 97 countries used BullionVault, owning well over 21 tonnes of physical gold (US$940m) and 140 tonnes of physical silver (US$129m) as their outright property. There is no minimum investment and users can deal as little as one gram at a time. Each user's unique holding is proven, each day, by the public reconciliation of client property with formal bullion-market bar lists.

BullionVault is a full member of professional trade body the London Bullion Market Association (LBMA). Its innovative online platform was recognized in 2009 by the UK's prestigious Queen's Awards for Enterprise. In June 2010, the gold industry's key market-development body the World Gold Council (www.gold.org) joined with the internet and technology fund Augmentum Capital, which is backed by the London listed Rothschild Investment Trust (RIT Capital Partners), in making an $18.8 million (£12.5m) investment in the business.

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Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events - and must be verified elsewhere - should you choose to act on it.

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