Thursday, April 7, 2011

The next big driver of gold’s bull market – China’s middle classes

The next big driver of gold's bull market – China's middle classes

The main drivers of gold's remarkable bull run are about to be joined by a major new source of demand - the appetite of China's middle classes. Dominic Frisby looks at the effect this is likely have on the price of gold.

Posted by damien @ 02:16 PM (2268 views)
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17 thoughts on “The next big driver of gold’s bull market – China’s middle classes

  • montesquieu says:

    More tedious gold-buggery.

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  • Yawn…

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  • general congreve says:

    @1 – Indeed, the real news today is more of Merv’s paper muggery. But is worth mentioning that last time we had a gold bull market, a large chunk of the world were under the iron fist of communist rule and unable to participate, now it seems they are being encouraged to do so, potentially making the market far tighter this time round. Supply and demand and all that.

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  • montesquieu says:

    From a historical and cultural perspective the Chinese precious metal of choice has always been silver, with gold little-regarded. It remains to be seen whether this would be a factor.

    Certainly if the cash-rich Chinese middle classes are being encouraged by the state to buy gold rather than real estate that would indicate a major inflationary driver, but equally could crash the market down the line if significant Chinese engagement was followed by a rapid policy reversal which is perfectly possible.

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  • The Americans are treated like naughty boys and girls for not having faith enough in the dollar v gold battle.

    Homeland terrorism will not be tolerated. Neo Liberalism is so messed up Barry, but it’s a great cover for all those disarmed

    and defenseless true patriots out there still waiting for change instead of more wars.

    Give him another Peace Prize, what a guy!

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  • Just out of interest, what’s the latest best way to buy & sell gold? Do people still like ETFs; if so which ones? Any good/bad reviews of BullionVault and similar sites?

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  • Skeptical First Time Buyer says:

    @6 if you don’t have it you don’t really own it.

    I would buy physical gold or silver, next mining stocks, and finally ETFs. ETFs have utility, but if things really do go belly up, then actually having the metal is the best position to be in.

    I also don’t like the idea of paying storage fees for gold and silver that doesn’t really exist.

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  • [email protected]: “what’s the latest best way to buy & sell gold?”

    ETFs are simple and quick but there are nagging doubts about the audits of the physical metals backing some of them up. Will Rhind oversees a gold ETF for ETF Securities and seems more reliable than some. James Turks’ goldmoney.com looks okay, as does bullionvault. My only experience has been with Bairds (goldline.co.uk) who are good in an old school kind of way. ETFs are basically good for tradeable short term holdings rather than longer term core holdings.

    Precious metals are now being bought, by some, because they “only ever go up in price” which is a story we’ve heard the gist of before. In addition to audit questions about gold vaults there are queries as to how many bars will ultimately turn out to have a gold plated core of tungsten. (Tungsten having the same density as the real thing; but a much higher melting point).

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  • @Drewster

    I think Sureseam has covered the electronic gold options reasonably well so I’ll say a few words about physical.

    If you want to sell physical, it’s hard to beat Hatton Garden Metals for convenience:
    1. Get a printed form from their website listing your items, contact and bank details.
    2. Post by special delivery in the morning.
    3. The money appears in your bank account in the afternoon of the next working day.
    I have used HGM myself without problems and others on the forums say similar things.

    If you want to buy physical, Baird & Co are fine (but two week clearance delay for cheques.)
    http://www.thegoldbullion.co.uk/ offer a fast payment service by debit/credit card but charge slightly higher premiums.
    Again, I have used Bairds and http://www.thegoldbullion.co.uk without problems and they also get good comments on the forums.

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  • general congreve says:

    @7 – Precious metals are now being bought, by some, because they “only ever go up in price” which is a story we’ve heard the gist of before.

    A good point and an emotive one for us HPCers. However house prices were only ever going to be driven up while lax lending continued, when that stopped, they stopped (cause and effect). In the same vein gold will always be driven up in a negative real interest rate environment, where inflation outpaces interest rates. Until interest rates match inflation (in fact history shows they typically have to be 2% above inflation to quell it) gold will only ever go up, just like everything else in an inflationary environment – more money chasing a fixed amount of goods.

    So what those in the know, know, is that ‘Gold only ever goes up UNTIL real interest rates turn positive’ (meaning gold’s safehaven quality is not required as much and positive yields can be found elsewhere). With the BoE sticking with the 0.5% base rate this month (so they can focus on the recovery!), you do the maths.

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  • More untruth from GC. GC I don’t mind you posting about gold, in fact I think it’s a relevant topic. I do however object to your choosing to post nonsense on the topic and given that the moderators are less then sympathetic about the subject it would be a small matter to report the ignorant ramping. You’re not stupid so stop posting patent nonsense.

    “However house prices were only ever going to be driven up while lax lending continued”

    Rubbish. In the period from 1998 – 2002 (period differs depending on where you live) house prices were rising from a deeply undervalued position and rises were driven by sound fundamentals. Beyond that loose credit played a part but even at this point there were other drivers eg tight planning regime and a believe that house prices could never fall.”

    “In the same vein gold will always be driven up in a negative real interest rate environment, where inflation outpaces interest rates”

    Always really? All of our lives have been spent in a negative interest rate environment. Inflation always outstrips interest usually compensated by increases in wages. Gold fell in price for 20 years in this environment.

    “Until interest rates match inflation (in fact history shows they typically have to be 2% above inflation to quell it)”

    History shows no such thing. See above. Also rem the graphs showing how much purchasing power the $ has lost over a 100 years – more than compensated by rising wages of course. But still the point is made.

    “gold will only ever go up”

    Just like house prices.

    “just like everything else in an inflationary environment – more money chasing a fixed amount of goods.”

    Flat wages, contracting credit. There is less money in the system now than during the credit bubble. True banks have more reserves but this is not reaching the populace. Gold itself is possibly telling this story, from its high of > $1000 oz in 2008 it has risen only 40% in 3 years. A rate of growth in % terms far far slower than in the years from 2000 – 2008.

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  • general congreve says:

    @10 – I do apologise Bellwether. For the sake of brevity I stuck with the main driver of HPI (and by that I was referring to the real boom times – not the bounce off an undervalued bottom) which I’m sure we both agree was lax lending. There is no shortage of housing in this country after all, I know of no one living on the street, it’s just that some are renting because prices have been forced up by lax lending, some of which went to allow BTLers to buy extra property so they can take it off the market and rent it to those that would have rather bought if prices hadn’t been forced up by speculation.

    Again, I apologise for any misunderstanding the brevity of my last post may have caused. I should have included the element of economic growth and wage rises in my explanation, as they also play a part in positive/negative rates on income.

    If your bank is offering you an above inflation rate of interest, the economy is growing and you are getting above inflation pay rises or rises that at least match inflation, than that is a ‘positive real interest rate’.

    So DESPITE inflation in the last 20 years and situations where occasionally inflation may have outstripped return on savings, this was offset by gains in wealth from economic growth and above inflation pay rises, making the environment one of positive returns on wealth.

    With regards to the extra money, it is not reaching the populace to spend at the demand end of the supply chain in a typical ‘Weimar’ scenario of inflation. Instead the banks are funnelling it into commodities and driving up prices from the supply end of the chain instead. Checked the prices at the pumps recently?

    And just for clarity, here is a historic graph showing real interest rates on one axis versus the 12 month rolling change in the gold price on the other (from those know nothings as Moneyweek BTW):

    Image and video hosting by TinyPic

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  • gc @ 11: “I’m sure we both agree was lax lending”

    Indeed but lending was lax largely because they believed deeply that prices only ever went up. Therefore the collateral would always be there, and there would be no risk to the lender – in theory.

    If one starts to reread finance propositions (e.g. mortgage offers) as philosophical belief statements by the lender … it starts to become both enlightening and unnerving.

    For example: an offer “125% LTV mortgage to be paid back over 25 years” translates to:
    – House prices must go up for the next five years (or we have all risks of negative equity)
    – It’s not our money anyway. (If the balloon goes up – the MBS will get hurt – not us).
    – Hidden extra costs. (Bet we can mug the punter into paying an insurance to cover our losses if trouble hits).

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  • general congreve says:

    @12 – Indeed, the banks miscalculated and as a result became even more lax with their lending until we hit 125% mortgages and Northern Rock got taken down. We can easily point the finger at lax lending as the main driver of HPI, only an idiot or someone with a personal vendetta would disagree.

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  • Thanks GC. I don’t agree with all you have to say and can’t respond in detail at present, but will think over. If it counts for anything (other than being patronising) the greater level of detail and precision in your post much less offends my sensibilities.

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  • paranoia blue says:

    The gold price has really paid attention to the bashers.
    PS Keep bashing, please. LOL

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  • general congreve says:

    @14 – Thanks accepted. However, I have trotted out this point several times before and posted the graph on at least 2 previous occasions at times when I am fairly sure we have conversed on the matter. That said, I should have included the graph for everyone’s clarity.

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