George Wolff: What goes up must come down, right? Readers will remember I predicted steadily rising gold prices weeks ago as turmoil in Washington exploded and Chinese demand ballooned. So what happens after the politicians finally get their act together? Will gold prices collapse and take other precious metal prices down with them?
Not very likely.
Why? Once again, China is taking its place as the engine driving worldwide economics and commodity prices. It’s not just about gold either. Right now Silver is white hot in China.
Retail investors who can’t afford gold coins are snapping up silver “Pandas” at a mind-boggling rate. Beijing is doubling its output of one ounce silver Panda coins from 3 million to 6 million this year.
Total output in 2010 was just 1.5 million coins. That means China’s demand quadrupled in a single year and it is still growing.
Investors who doubt the sustainability of silver prices remember all to well the recent price collapse for the white metal. Three months ago silver plummeted from its peak in the $50 range, and pundits said the bubble had burst for good. But that’s not what happened.
Silver is now bouncing back from its recent bottom, partly on booming demand from Asia. Growing demand for silver in China, as well as India could drive a price rise of as much as 30 percent on the year, according to MineWeb.
Sales of Panda coins are not the only indicator. Imports of silver to China have risen dramatically. In 2010, imports of silver by China quadrupled, hitting a record of 3,500 tonnes. MineWeb says the pace of Chinese imports since the start of 2011 is still strong.
China’s appetite for hard asset investments seems insatiable. But for most Chinese investors real estate has been priced out of sight. Banks pay a paltry interest rate yet inflation is well above six percent.
That’s why all that glitters appears to be so attractive.
All That Glitters
Diamonds are the latest bit of bling to put a new sparkle in Chinese eyes.
De Beers, the world’s largest producer of diamonds, says it plans to begin a major expansion of its retail outlets in China this year. The company expects China, India and the Middle East to outpace U.S. demand, accounting for 40 percent of the global consumer market for diamonds by 2015.
A few years ago India and China together accounted for just a few percentage points of global demand. But China is now the world’s second largest diamond market, snapping up 11 percent of worldwide demand. For now the U.S. is still the world’s largest diamond consumer, accounting for about 38% of total global demand.
DeBeers says rough diamond sales rose 33 percent during the first half of the year due in part to, strong demand from consumers in China and India. The privately held firm was able to hike prices about 35 percent. DeBeers has a retail partnership in Asia with LVMH Moet Hennessy Louis Vuitton (LVMUY).
A number of other jewelry chains are expanding in China. Unfortunately I cannot recommend any Chinese chains for investment because of recent questions about accounting practices at Kingold Jewelry (KGJI) and Fuqi International (FUQI).
Going For Gold
Every investor knows that gold has enjoyed an unprecedented rise as the U.S. dollar has declined, European debt has trembled and confidence in Washington has ebbed. Will the trend continue?
I am constantly getting more indications from China that demand for gold continues to soar. Investment demand in China more than doubled to 91 tons in the first three months of this year. Consumption of gold jewelry rose 21 percent to a record 143 tons.
China’s total gold demand in the first quarter jumped 47 percent from a year ago to 234 tons. (That’s still less than Indian consumption of 292 tons, but China has catching up quickly on the world’s leading gold buyer.)
China’s internal gold production has risen to approximately 400 tons a year but it seems that is not nearly enough.
The nation’s biggest gold mining company, China National Gold Group announced that it wants to invest
in projects in Africa because it expects bullion to trade near record levels for the next three years.
Shortly after that announcement another Chinese miner, Zijin Mining Group (HKG:2899) agreed to buy a minority stake in Australia’s Norton Gold Fields Ltd for $27.67 million Australian dollars (US$30 million) to boost gold its reserves. Zijin paid a 31 percent premium over the market price for its minority stake.
The big unknown is the amount of gold that China is buying for its national reserve. That amount is believed to be about 1,000 tons but the total could be climbing as Beijing scrambles to find ways to diversify away from foreign currency holdings.
It’s easy to see why:
Currency basket vs. gold since 1999
As I reported a few issues ago, sales of China’s gold “Panda” coins and gold bars to Chinese investors are also booming.
Where will gold prices go? As always with commodities in the news, predictions can go from the sublime to the ridiculous. Nobody has a crystal ball but there’s reason to believe the words of the president of China’s largest gold company: “Gold prices will fluctuate at historically high levels for another three years.”
In other words, growing Chinese demand will likely put a floor under the price of gold (and perhaps silver) for three years. The upside could be considerable, with some sources predicting $2,300 an ounce. (Source: Ronald Stoeferle, Erste Bank of Vienna, Fifth Gold Report).
With fiat currencies losing their luster, its small wonder that retail investors in China and the west are increasingly considering a safe haven position in precious metals. And, it is small wonder that China’s gold mining giants are searching the world to buy up undervalued mines.
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