How a Chinese stock and property bubble will affect gold prices

I have the temporary misfortune today of feeling a bit under the weather. I’ve always wondered how such an expression came to pass, but if it is meant to be any sort of metaphor, my ‘weather’ is something like a category five hurricane.

As a consequence, I was unable to attend this week’s Asia gold conference which took place in Hong Kong; fortunately, though, my friend and colleague Christine Verone was in attendance, and her account of the event was quite interesting.

To listen to Christine describe it, the conference was a veritable who’s who of Asian investment managers, many of whom have their eye solidly fixed on the yellow metal’s growth potential.

Here on the mainland, there has been much debate over the central bank of China’s easy monetary policy and fiscal stimulus measures; unlike in the United States where broad measures of money supply (“M2”) have changed relatively little, Chinese money supply has grown nearly 30% year over year, according to the Financial Times.

Considering that the government’s stimulus programs will total roughly 15% of GDP, and lending is up 149%, there is certainly reason for caution. With credit flowing so easily, everyone has access to large sums of capital– and that capital has to find a home somewhere.

Typically, loose cash tends to find its way into real estate and equity markets– and this is exactly what is happening now; easy money leads to an abundance of capital that goes rushing in to property and stock… both markets surge.

One could point to the Shanghai Stock Exchange as evidence, which has more than doubled since its March low. What I find more interesting, however, is the new “Chinext” stock exchange that literally just launched today.

Chinext is designed to be China’s version of NASDAQ or the American Exchange– a low cost stock market where small and medium sized companies can access eager public funds.

The average Price/Earnings ratio of the first round of companies to be listed on Chinext? 55… a valuation so high that it’s almost comical.

Clearly, Chinese investors have been seeking new instruments for their capital, even when the abundance of capital pushes up valuations to surreal levels.

The grumblings about a bubble in the equity and property markets, though, have already begun… which means that, before too long, a great deal of that capital will be looking for a new home. Based on our observations on the ground, it looks like that new home will be gold.

This to me will be one of the biggest catalysts for an increase in gold prices, even as much as the rapid expansion of the US Federal Reserve’s balance sheet. China, having recently launched its own homegrown gold exchange, now has the appetite, capital, and platform to make serious gold investments.

I do not expect gold to rise in a straight line on Chinese demand– there will likely be a concerted effort from world governments to occasionally tame the price. In the long run, though, I expect that we will look back in a few years and regard 1,050 gold as a bargain.

Have a great weekend.

About the author

James Hickman (aka Simon Black) is an international investor, entrepreneur, and founder of Sovereign Man. His free daily e-letter Notes from the Field is about using the experiences from his life and travels to help you achieve more freedom, make more money, keep more of it, and protect it all from bankrupt governments.

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