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Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Gold Safehaven as China Investors Go on Buying Spree

Commodities / Gold & Silver Dec 11, 2007 - 09:05 AM GMT

By: Gold_Investments

Commodities Gold
Gold was up $13.20 to $807.60 per ounce in New York yesterday and silver was up 30 cents to $14.64 per ounce. Gold has traded sideways in Asian and early European trading and is trading at $807.50/808.00 per ounce at 1200 GMT. Gold has increased slightly in pounds sterling and euros and at the London AM Fix gold was trading at £393.79 GBP (up from £392 at 1200 GMT yesterday ) and €549.15 EUR (up from €545 at 1200 GMT yesterday). < http://www.lbma.org.uk/statisti cs_current.htm


Besides obvious and merited risk aversion building in the financial capitals of the western world, there is increasing demand throughout the world for gold due to it's safe haven attributes. We noted in recent updates that Russian billionaires were building strategic stakes in the gold industry and the Russian central bank is aggressively adding gold to it's foreign currency and gold reserves.

Now comes the bullish news that extremely wealthy high net worth Chinese investors are now beginning to diversify out of Chinese property and shares and into gold bullion. At the start of 2007 there were more than 60 billionaires in China and according to Merril Lynch there are more than some 345,000 millionaires in China (up 8% from a year earlier). Total assets owned by Chinese millionaires alone reached $1.7 trillion

UBS, the world's largest wealth management group and Europe's largest bank in terms of assets, noted in their UBS Metals Daily a Reuters news story on this development: 'China's wealthiest investors set for gold spree.'


"China's wealthiest investors are on the brink of ploughing as much as $68 billion into gold markets as they take profits from roaring share prices and steer clear of property, a top fund manager and bullion bull says. Wang Weilie, a pale, bespectacled 40-something who manages over 1 billion yuan ($135 million) on the Shanghai Gold Exchange on behalf of himself and clients, says the so-called "Zhejiang clique" are ready to pounce after Beijing opens up spot market bullion trading and a futures contract launches early next year. After amassing an estimated 3 trillion yuan ($400 billion) from investing in red-hot real estate and stock markets which have risen five-fold in the past two years, the wealthy group from eastern China is looking for the next sure bet. Wang says that's gold, and expects the amount of Chinese capital invested in the bullion market to soar 100-fold to some 500 billion yuan ($67.5 billion) in the next two years -- a sum that could catapult China ahead of India as the world's top buyer.

"We all agreed that upside room on stocks was limited, as was upside on property prices. But the gold price has only increased minimally, even after 20 years of China's reform and market opening," Wang told Reuters during a lunch with three business partners in Lujiazui, Shanghai's financial hub. Coupled with inflation and global economic uncertainty, the redirection of Chinese capital towards domestic gold contracts will help spot prices more than double, says Wang, who says he once cornered two-thirds of the Chinese gold forward contract. "Spot gold prices will hit $2,000 in coming years," he said. Spot gold touched a 28-year high of $845.40 per ounce in early November, nearly doubling over three years amid a flood of investment in the commodities complex -- much of it driven by China's growing demand for raw materials to fuel its economy. Wang expects more than 15 percent of the capital currently invested in China's stock market to move to gold trading. China's total market capitalization peaked at about 35 trillion yuan in October, exceeding the country's gross domestic product. The main stock index tumbled nearly 20 percent last month while Beijing has continued tightening controls over the property sector to limit price gains."

Predictions of a 100 fold or 10,000% increase in Chinese demand might sound irrationally exuberant at first glance but they are not. A 100 fold increase would only result in Chinese capital of some $67.5 billion flowing into gold. This is a large amount as gold is quite a small marketplace in terms of the total vaue of all above ground gold stocks. However considering that Baidu, the Chinese internet company has a market capitalisation of $13.3 billion alone it puts this likely increase in demand in perspective.

This huge private demand is likely to be complimented by Chinese state and central bank investment in gold. An article in Reuters in May 2007 said that: “Chinese economists are urging Beijing to quadruple its gold reserves to 2,500 tonnes from the current 600 tonnes, because the country foreign exchange reserves had become the world's largest, an official industry newspaper reported on Tuesday.”

In addition to Russian and Chinese demand, Middle Eastern demand is very robust and increasing significantly quarter on quarter and year on year. Turkey's gold imports rose 22.4 percent year-on-year to 220 tonnes in the first 11 months of the year, data from the Istanbul Gold Exchange showed. Istanbul is a key supply hub into the Middle Eastern market. Geopolitical tension and macroeconomic risk in the region are being cited for the surge in gold imports.


Silver
Silver is trading at $14.61/62 at 1200 GMT.

PGMs
Platinum was trading at $1460/1464 (1200 GMT).
Spot palladium was trading at $344/350 an ounce (1200 GMT).

Oil
Oil stayed at just above $88 a barrel in early European trade Tuesday.

Gold Investments
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