The Chinese Gold Rush

While in Beijing last week, I visited the Cai Bai gold market. China is the largest buyer of gold in the world…and becoming larger by the day.

Anecdotally, I can tell you the Cai Bai gold market was bustling with people. (I wish I could show you, but a guard promptly stopped me when I pulled out my video camera.) I was there in the middle of the day, and there was a good crowd of people buying gold in all its forms – from jewelry to bars.

The numbers coming out of China back that street-level view. May is a peak gold-buying season in China, as it is a popular time for weddings. Even so, gold sales are up over 70% year-over-year, and the sale of gold bars has doubled from a year ago, according to CCTV, the large state Chinese television station.

The surging demand may be the result of Chinese investors shifting their focus from real estate to gold. This is a snippet from CCTV’s report, which gives you a peek into what is starting to happen:

“Housing speculators from Wenzhou City in southeastern China are switching their money from property into gold following government restrictions on the real estate market.

“Tao Xingyi, president of Beijing-based Jinding Group, a company specializing in high-end gold trading and investment, said the company’s customers have increased by 300-400% recently…

“Tao said that within one month, three groups of Wenzhou investors made purchases of gold from his company worth more than 10 million yuan (about $1.5 million).”

We often heard on our trip that the Chinese buy empty apartments and just sit on them, treating the investment as a store of value. Their other favorite place to park cash is gold.

So this transition from real estate to gold is potentially a very big story, if such actions become common across China. That’s a lot of buyers coming to the market. It’s a story we heard more than once on our trip.

While in China, I met with Patrick Chovanec, a professor at Tsinghua University in Beijing. We dined one night at a 500-year-old restaurant in town, amid a striking interior made up of thick wood beams and traditional Chinese woodwork. In addition to his professorial duties, Chovanec advises hedge funds and investors in China.

Chovanec is an expat and writes a blog called An American Perspective From China. Commenting on CCTV’s gold story, he wrote:

“I find it very interesting given the analogy I’ve always drawn between the way Chinese invest in empty apartments as a ‘store of value’ and investment in nonproductive assets like gold. So it might very well make sense that, if they are no longer so certain stockpiled real estate will act as a reliable store of value, they would opt for gold as an attractive alternative.”

This dramatic surge in Chinese gold demand is just one more trend in the yellow metal’s favor. When you consider that robust Chinese gold-buying is occurring in the context of volatile currency markets and deteriorating government finances in the Developed World, it is easy to imagine a much higher gold price.

Chris Mayer
for The Daily Reckoning

The Daily Reckoning