China is gradually opening its markets for gold
Earlier this week the Chinese central bank announced that it will start gradually liberalizing domestic gold markets allowing its banks and producers to seek buying opportunities overseas. Being the largest producer and the second largest consumer of gold, this could be very positive news for the yellow metal. China is the largest growing economy in the world and with the population of 1,4 billion, the size of the new market is mind blowing. The average Chinese citizen saves up to 40% of his income and the government is encouraging them to hold physical gold.
You might wonder why would the largest gold producer open its markets when the price of gold is hitting record high. The reason is fairly simple. The Chinese economy is growing so fast that the domestic suppliers of gold aren’t capable of meeting the growing demand.
Another reason is the weakening Dollar. China is largest financier of America and holds a huge amount of Dollars. China needs to either spend or diversify its foreign exchange reserves to avoid the risk that current actions of U.S government are causing. Even if China doesn’t decide to buy gold from abroad, any movement away from Dollar would be positive for gold.
Before making any hasty conclusions we must keep in mind that it is not in China’s best interest to start buying large amounts of gold from overseas since this would cause the price of gold shoot up. As a result the value of the Dollar would drop even more and as mentioned earlier, this wouldn’t serve China’s best interest – at least not yet. Chinese companies have been active in the western investment markets in the past few months. This could be seen as an attempt to reduce the massive Dollar surplus since all Chinese companies are owned by the government.
In general the gold market seems to be shifting from west to east as the big Asian economies are getting wealthier. China and India have been big markets for gold for a long time but recently countries like Indonesia and Turkey have started to stock up their gold reserves. Gold is also seen more as liquid money in Asia than in western countries, which makes it a more common investment in these growing economies. When adding up the population of China, India and Indonesia, we have almost half of the world’s population getting richer and demanding gold.
The only factor that could hold back the rising demand, at least temporally, is the Chinese government’s plan to implement bank stress tests. These tests would measure what impact a 60% dip in property prices would have in banks liquidity. If the banks fail these tests the impact on markets would be more psychological because 60% drop in housing prices is highly unlikely. Failure could lead to more regulations and delay the markets liberalizations plans. On the other hand if the banks pass the tests, it could kick off another huge gold rally. We are anxious to hear more news from the east in the coming weeks.
Tags: Economy, Finance, Gold, Gold Bullion, Investing, markets