The Chinese Gold Market

I’ve been spending a lot of time this week talking to my sources in China, one of whom is inside one of the country’s sovereign wealth funds (SWF).

He could not discuss the details of the Rio Tinto bribery scandal, but indicated that it was far more about saving face and establishing position than anything else.

He also indicated that the SWF analysts were working around the clock trying to put deals together… for China it’s a race against the clock for how fast they can convert their $2 trillion in US dollar holdings into strategic assets– namely oil and gold.

At today’s deflated prices, putting together a really good billion dollar deal is a difficult thing to do. Putting together 2,000 of them is impossible.  Doing it before the dollar collapses? No chance. And they know it.

So as a hedge, the government appears to be pumping up demand for gold and silver among the public, possibly preparing them for an imminent dollar decline.

I asked Christine Verone, my China insider you heard from last week, to shed some light on the Chinese gold market to provide some clarity:

It’s funny you ask, I just got off the phone with one of the key executives at the Shanghai Gold Exchange.

You know, for the past 50 years, the Chinese government has controlled the distribution of all types of gold. They dictated prices and forbade citizens from owning or trading any type of precious metal.

It didn’t matter if you were an individual investor, a gold miner or a processor…it was state asset.

In 1959, if you were caught with gold in your possession you were thrown in jail. The result of this policy has been widespread indifference and very little understanding for precious metals as asset class or sound money.

The government is now taking radical measures to change that.

Fast forward to 2009– the FIRST year that the Chinese public is allowed to own physical gold or silver.  The government is now trying to drum “gold/silver as an investment” into their heads at every corner.

Banking products, investment products, checking accounts linked to gold.  In fact, Chinese have more precious metal investment options than Americans, and the statistics are alarming:

In 1950, China had next to nothing in gold reserves. Today they rank 10th globally, and they are frantically mining for more on their own soil.

For the past half a century, the Chinese had the lowest per capita consumption of gold in the world. Next year, Chinese gold demand will likely surpass that of India.

This year, the government banned silver from being exported… and by July, it was being promoted as an “investment” to the Chinese public on the 6 o’clock news.

You do the math– how does that affect global demand if just 10% of Chinese begin to perceive silver as an investment?

Will the Chinese turn into goldbugs overnight? No. Over the next 5 years? Probably, yes.

I like your long-term silver option strategy for this reason.  Even the smallest shift in Chinese investor/consumer preferences can dramatically alter global demand and commodity prices.

From what I’m seeing from the ground, the Chinese government is engaging in one of the most explosive financial marketing campaigns in history.  Instead of Maoist propaganda, though, they are attempting to change the entire perception of  gold/silver in the Chinese public.

Simply put, the Chinese government is trying to trigger a national gold craze…and it’s working.

The Chinese public now has gold trading platforms on steroids.

You can buy silver bullion or gold bars at any Chinese bank in four different sizes.  Wealth management products tied to gold are skyrocketing in popularity, and the public can now instantly buy, sell, and trade gold 24 hours a day in five different forms with different eight types of services.

Also, for the first time in history, Chinese investors can even trade gold abroad (in London) with the swipe of a “Lucky Gold” card.

I can’t even get Bank of America to open a foreign currency account.

Simon again. There is a reason that the Chinese government is promoting gold and silver ownership, this is not coincidental. More to follow.