The world’s largest producer of gold, China, has increased its gold imports by nearly five times in 2010. As Chinese consumers increase their investments in gold to stay ahead of rising inflation, experts believe that the circumstances in China could provide strong support for rising gold prices in 2011. See the following article from International Living for more on this.
China dropped a bombshell this month.
Not the kind the North Koreans have been dropping on their neighbors in Yeonpyeong Island. But one that has explosive consequences for investors nevertheless.
In front of a packed press conference Shen Xiagrong, chairman of the powerful Shanghai Gold Exchange, revealed that China’s gold imports had rocketed almost fivefold so far this year.
Imports were up to 209 metric tons, compared to 45 tons for all of 2009.
That’s a lot of gold. It’s 5% of the entire gold reserve held at the United States Bullion Depository at Fort Knox.
And about 70% to 80% of these imports were in mini-gold bars – exactly the kind of bars Chinese investors like to hold.
This import surge is even more impressive when you consider that China is also the biggest gold producer.
This means two things:
1. Ordinary Chinese and the Chinese government – which has to approve these imports – are worried about inflation.
2. The gold price could be about to go stratospheric.
Let me deal with each of these issues separately. Then I’ll let you know how to play the situation.
First, the inflation question.
There’s no doubt Beijing is concerned about rising consumer prices. It has already threatened to use price controls and raise interest rates for the second time this year.
China’s consumer prices jumped 4.4% in October from a year earlier. This was the fastest pace in two years…and well above the government’s full-year target of 3%.
Food prices are rising even faster – at a rate of about 10%.
Inflation at these levels means Chinese savers are actually losing purchasing power by putting their money on deposit with a bank.
One-year yuan deposits with the Bank of China, for example, earn about 2.5% in interest. With inflation running at 4.4%…and expected to rise to 5% this month…that’s a loss in purchasing power of more than 2%.
Gold is a way around this. Investing is heavily controlled by the state in China. But if Beijing allows imports to rise and ordinary Chinese to invest in gold, it offers a way for Chinese citizens to stay ahead of inflation. That’s because the price of gold tends to rise as consumer prices rise.
As I told Alpha Hunter members, the world faces a big gold supply crunch over the next decade. Against this backdrop, increased demand from China could send gold prices soaring past the $2,000/oz mark before long.
Bullion prices have already surged 27% so far this year. Another rise of this magnitude would bring the gold price to $1,769/oz by this time next year. If it rose another 27% from there, we would be looking at gold at $2,246/oz by Christmas 2012.
Here’s the thing: thanks to increased Chinese demand, we could be in for an even greater surge in 2011 than we saw so far this year.
That rise in demand is nothing less than stunning. Ten years ago Chinese investment gold demand – demand not related to jewelry, etc – was about three to four tons a year. This year it could be 150 tons – about 8% of global investment demand.
With China’s securities regulators recently giving the go ahead for a mutual fund to invest in foreign exchange-traded gold funds (gold ETFs), this rise in demand could make a huge difference to prices – especially if Chinese inflation continues to climb.
I recently recommended to Alpha Hunter members a way to cheaply own gold that’s stored in one of the safest places on earth for the yellow metal—Zurich, Switzerland.
But if you’re serious about growing your assets in 2011, there’s really only one thing you need to do. This is it.
This article has been republished from International Living.