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Doubling of gold demand in China to backstop the gold price fall

Posted on 15 July 2013 with 1 comment from readers

Strange when demand for a commodity increases the price usually goes up. Not so for gold this year in China where the Shanghai Gold Exchange has supplied more in the first half of 2013 than in the whole of 2012.

It supplied 1,098 tonnes in the six months to end of June, compared with 1,139 tonnes for the whole of last year, according to the latest data from the exchange. Gold output in China, now the world’s largest gold producer, reached a record 403 tonnes last year said the China Gold Association.

Big demand

These are large figures. If sustained China would have raised its gold holdings to Fort Knox levels. China will pass India as the world’s largest gold market this year.

Why are the Chinese still buying with the price of bullion down 23 per cent this year? Should they not be worried about buying an asset whose price seems to be in free fall?

It’s true demand has been easing back from the record surge in April when the gold price fell out of bed. Gold deliveries are down from the record 236 tonnes in April, having eased to 224 tonnes in May and 180 tonnes in June.

However, buying anything when it is on sale has a certain logic. Indeed, there is more logic to buying then than chasing prices higher as we presently see on Wall Street with stocks.

Gold protection plan

But the Chinese have a wider plan. They want to own gold to protect themselves against the collapse of the highly indebted US dollar complex. It’s a rotation out of US paper and into an asset with intrinsic value.

The Chinese Central Bank most likely also intends to buyback the gold that is held by the public as a way of suddenly boosting its reserves at an opportune moment, like when gold becomes a part of a new super-currency for central banks.

China did not become rich through short-term thinking and its gold buying is a far longer term project than it might appear from the old aunties rushing to snap up cheap gold. It’s the ultimate hedge against a devastating inflation and a move against holding all its assets in the US dollar basket.

For the Chinese aunties it is probably more a sign of their lack of confidence in their own economy and a worry that it is on the brink of collapse. Gold is one of the few investments they have outside of their system!

Posted on 15 July 2013 Categories: Gold & Silver

1 Comment posted by readers:

Comment by Chad - 16 July 2013

I don’t think that with the way the dollar index is fluxuating that it is unreasonable to think that gold will rise to 1,350 an ounce or even 1,400.

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