So why do the Chinese keep on buying gold when the price is still falling?

Posted on 03 December 2013 with 5 comments from readers

There has been no let up in the buying of gold by China despite the continuous price falls this year. Gold imports via Hong Kong in October hit 130 tonnes, that was the second highest monthly total in history and a massive jump on the same month last year.

China’s imports through Hong Kong will easily top 1,200 tonnes in 2013. But these are just gold import figures that are made public. Gold also enters the Middle Kingdom through other trade routes that are not as scupulous with their data records, notably Shanghai.

2,000 tonnes in 2013

If you add these non-recorded gold imports then analysts say the total quantity of gold imported into China this year will top 2,000 tonnes. Why are they buying it? Nobody else seems to want gold right now. It’s the most unloved commodity outside of China.

Gold bullion is physically moving from the West to East out of London, Zurich and New York and into vaults in China. The gold is coming from sales by the big gold exchange traded funds as well as newly mined global production. China is a major gold producer itself but not a bar leaves the country.

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At the current rate of consumption by China there will soon not be enough physical gold left for trading in the traditional markets for precious metals. There will be a massive supply crunch and that will mean only one thing for gold prices, they will go up.

This sort of explanation does not satisfy the day traders who comment on ArabianMoney and ask us to shut up about gold and re-focus on rising global stockmarkets (although they fell too yesterday). They are looking at what has happened in the past rather than considering the future outlook. Forgive us but that is not how investment works.

You have to use all the available information and facts, and a fair amount of imagination to project into the future. Exact timing is always impossible. Getting the broad trends right over the longer term is more than enough to become a highly successful investor.

Gold buying accelerating

If Chinese gold buying was slowing down then we would be concerned too about the outlook for precious metal prices but it is accelerating. That just brings the inevitable price squeeze closer.

The Chinese have a larger plan and that is for gold to underpin a global currency reset after another major financial crash that will start in bond markets when interest rates head up. That’s already started with US mortgage rates and the rising yields on Chinese government bonds.

The Chinese Government’s not-so-covert plan is to snap up as much gold as possible while the Fed has its foot on gold’s throat, and therefore be in a far stronger position to recover from the coming global bond market crisis. Retail buying by the Chinese ‘aunties’ is gold that can be confiscated later for official reserves. China knows the real value of gold.