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Chinese equity bubble to pop boosting gold prices as China officially confirms its huge gold reserves?

 -- Published: Sunday, 26 April 2015 | Print  | Disqus 

By Peter Cooper

The Chinese equity bubble continued to inflate last week with 3.5 million new brokerage accounts. How long can the market sustain that sort of momentum? Another week? A month? That’s the problem with exponential market movements. They always run out of new buyers very quickly and then what has gone up will go back down again.

What will the Chinese retail buyers do then? Not everybody will lose their shirt. There will be those who take the chance to sell out at a profit while the madness of crowds continues. They won’t want to buy shares having just watched the market blow up, or houses for that matter as Chinese real estate developers have only just started to go bankrupt.

Gold rush?

No the only other asset class available to them is precious metals and the Chinese are already the second largest buyers of gold after India. Indeed all the official data about the movement of bullion over the past few years points to a massive transfer of gold and to a lesser extent silver in the direction of China.

One event eagerly awaited by goldbugs is an announcement by the Chinese government that its official gold reserves are now revised up to 3-4,000 tons. That could happen as soon as next month at an International Monetary Fund meeting to discuss the composition of the Special Drawing Rights or later in September.

On the other hand, the Chinese are in no rush to make their position clear as keeping quiet about this process has allowed it to happen at much lower bullion prices than otherwise. Still only last week a central bank official noted that China could not keep more than two per cent of its official reserves in gold because the market was too small.

Hoarding gold

That is true when gold is only worth around $1,200 an ounce. If this currency is revalued to its proper market level then it could be a lot more useful, and that presumably is why China has been buying so much of it.

China knows from its long history what happens when countries print too much currency. It invented paper and has witnessed many disastrous episodes of money printing in its own past. Buying up bullion on the cheap is a way to secure a key position in the coming currency reset when this system goes up in smoke.

So which will come first: the bursting of the Chinese equity bubble or news about China’s massive gold reserves? Probably the former but both will inevitably happen and that makes gold a very good buy right now.

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 -- Published: Sunday, 26 April 2015 | E-Mail  | Print  | Source:

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