Gold buying from Arabia will likely outpace China
Posted on 30 March 2010 with 3 comments from readers
The latest report from the World Gold Council, ‘Gold in the Year of the Tiger’, concludes that Chinese gold consumption could double in the next decade if its economy continues to grow at a rapid pace.
China is presently the world’s second largest gold consumer after India with 11 per cent of global demand. Last year China consumed more gold than it produced: 423 tonnes versus 314 tonnes with investment and jewelry the main sources of demand for the yellow metal.
1970s gold boom
But in the 1970s gold boom the Middle East was the market that drove gold prices higher and higher. The region is still a huge gold market and consumed 250 tonnes last year, admittedly down 28 per cent on the year before due to the economic recession that hit Gulf expatriates especially hard.
However, it is one thing to read the official statistics about gold. The real market for physical gold is quite different both globally, and locally in the Middle East.
In November 2008 ArabianMoney reported on a record $3.5 billion purchase of gold by Saudi Arabian investors (click here). Many of these gold deals go unreported and are metal deals between individuals, often of very substantial size.
Rumors of gold hoards buried in the Arabian desert may not be so wide of the mark. But the scope for con-men to hone such stories into believable investment opportunities is legendary and due diligence is called for in any such transaction.
What certainly seems to have happened among the super-rich of Arabia is that gold has become very popular as a safe haven asset without third party risk. In the wake of global banking and investment crises and scandals the absence of a third party is particularly desirable.
Gold as money
In short, there is nobody between you and your money. Gold is money. The recent rally in global stock markets has also been treated with much skepticism in Arabia. It would be surprising if investors here emerged as net buyers of global equities rather than sellers into this rally.
It would also not be surprising if Arabian investors were secretly amassing gold hoards, and just doing it on the quiet to avoid sending the price up when news of their massive transactions emerged.
Could it be that gold buying from Arabia will outpace China in the future, if it is not already actually doing so behind closed doors? It is perfectly possible, especially if the Chinese economic miracle proves to be yet another bubble waiting to burst.
3 Comments posted by readers:
@ Peter:
I’ve read that Arabian countries hold more US dollar (USD) reserves than the $ 1 trillion that the Chinese government is currently holding. Using simple math, it makes sense.
The real question, then, is “how are the Arabian countries going to invest those petro-USD?” On the visible radar screen, we’ve seen only a small amount of their USD being invested.
Your supposition makes perfect sense, and I believe that they are secretly buying physical gold on a regular basis. If I were them, I certainly would invest a reasonable percentage of all those petro-USD in physical gold, which has always endured the test of time over many centuries.
You ain’t seen nothing, yet. Once the oil supply can no longer meet world demand, (my guess around the year 2016, depending on Iraq), and refineries start to shut down because they can’t get enough crude oil to keep them going, the amount of money flowing into the Middle East, and other oil exporting countries will become phenomenal. Nothing like it has ever been seen in human history. I’m talking tens of trillions of dollars and euros. It will be hard to find somewhere to invest such a huge amount of money, especially since some countries will resist having all their businesses bought by ‘foreigners’. If you think that China, Brazil and India will sell all their businesses, you will be in for a surprise.
Brazil has its’ own oil. It has the greatest economic development potential of any large country on this planet. China is a communist dictatorship that will do what it likes. They will keep all the good stuff. In 10 years, no one who isn’t Chinese will control any important part of the Chinese economy. India is inward focused, and has a lot of reform and social change to accomplish before it can make much economic progress. Russia has all the oil it needs, and is a criminal state still run by crooks and murderers. They put bullets into female reporter’s heads walking on the street. It will take a miracle for Russia to become an economic world power, although with such vast natural resources, it certainly should be.
All of these large countries have national pride, feel that they have been kicked around by the rich West for far too long, and don’t embrace unfettered Western style capitalism. Their national champions will stay national champions.
None of this is too evident today, but could become so, once folks with trillions to spend start buying everything in sight. That is when gold, silver, platinum and palladium will shoot up from oil money investment. This might be especially true if the exploding cost of oil causes ruinous inflation. Would you rather own gold, or a dollar that it takes 20 of which to buy a loaf of bread?
So yes, gold will probably have its’ day, but it could still be a ways down the road. One thing that is certain. Unlike paper money, gold can never become worthless.
Land is like that too. That is why the wealthy tend to own a lot of it, often all over the globe. Do you know who the largest private land owner in the USA is? It is Ted Turner, the founder of CNN. They collect beautiful wives too. Remember Jane Fonda? Yes, I’m jealous. And not because of his bison herd.
@Bill Simpson: Excellent points, all!
@ Peter: No response?