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Why You Should Buy Gold Before China Does

How to Front-Run the Chinese, Legally: Part 2

Written by Brian Hicks
Posted August 4, 2010

A couple of weeks ago, I told you how to front-run Chinese traders in the energy market.

This week, I will show you how to front-run the Chinese in gold.

This morning gold spiked in price more than $17 per ounce to again break above $1,200/oz.

What was the catalyst?

News out of Beijing that the Chinese government was relaxing its rules on who can own the yellow metal...

According to the Financial Times:

China has moved to liberalize its gold market further, increasing the number of banks allowed to trade bullion internationally and announcing measures that will encourage development of gold-linked investment products.

The move by Beijing’s central bank comes as the country’s investors pour record amounts of money into gold, in a trend that is becoming a significant factor on global prices.

“This is a positive sign for the gold market,” said James Steel, precious metals strategist at HSBC in New York.

“The Chinese statement reaffirms the vigor of the emerging markets’ demand for retail physical bullion.”

New gold-linked investment products?

Currently gold makes up less than 2% of China’s foreign reserves right now.

In fact the exchange-traded fund GLD holds more gold than China does.

Take a look at the top 10 owners of gold:

goldchartbrian

As you can see by the above chart, China would have to increase its gold reserves seven-fold to reach the gross tonnage levels of the United States. But on a percentage basis, forget about it.

So how big can the gold market in China get?

Growth figures coming out of China are astounding. Automobile manufacturers — including the high-end car producers like BMW — cannot keep up with the demand from newly-enriched middle class Chinese.  

According to BMW’s quarterly report that was released yesterday:

The number of BMW, Mini and Rolls-Royce cars sold rose by 12.5% in the quarter.

This included a 3.6% growth in Europe and a 5.6% rise in the U.S.

The most spectacular growth was seen in Asia, where quarterly sales were up by 59.4% at just under 70,000 cars.

More than 45,000 of these sales were in China and Taiwan almost double the volume seen in the same period in 2009.

The Chinese middle class is growing in both gross numbers and percentage terms dramatically, as this nation of 1.4 billion people is developing on every front.

Their disposable income is rising faster than even they imagined.  

Historically, China is a nation of savers. The last time I checked, the average Chinese saver saves up to 40% of his income. So it is not surprising, then, that the Chinese government is encouraging investment in gold.

Again historically, the Chinese have been only able to stash away money in bank accounts. But that’s changing rapidly...

The recent volatility of the Chinese stock market tends to deter the new prudent Chinese investor.

Gold is therefore seen has a much better safe haven than stocks.

So two things will have to occur for the Chinese to build its gold reserves:

1) Bid up the price and buy current supply at a premium; or

2) Increase supply through production.

Or maybe both.

Over the next several years, profiting from gold will be like shooting fish in a barrel.

I want me gold,

Brian Hicks

P.S. If you want to front-run the Chinese in gold, this is — without the doubt — the easiest, most profitable way to do it. 

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