Monday, September 21, 2009

Could China's Government Send Gold Soaring?

As the value of the US dollar goes down, holding dollars could become more of a risk to your portfolio. That is why hedging your investments in gold could be a smart move. The following post from Daily Wealth discusses the possibility of a looming gold bubble.

Inside sources have recently confirmed the Chinese government is actively promoting gold and silver investment to the masses.

Some analysts now contend that China can no longer afford to let the gold or silver price slump.

The rationale behind that contention is that with the Chinese government now telling the general populace to buy precious metals, it would be highly problematic should gold and silver subsequently take a nose dive.

In many cases, what a government wants and what ultimately occurs can be wildly different, due to unintended consequences rarely foreseen by officialdom, and because once the masses get it into their heads to break one way or another, government's desires are largely ignored.

"You shall not smoke marijuana," says the government. "Roll me another," says John Q. Public.

But in the case of gold, interestingly enough, the Chinese government has the means at its disposal to actually do something about prices. Namely, at $1,000 an ounce, the total value of all the gold ever mined comes to about $5 trillion.

Of that amount, less than $1 trillion is held in official reserves, the rest under mattresses, in jewelry and family heirlooms, and in various ETFs – GLD being the biggest, by far, holding about $34 billion worth of gold.

Against these totals, China has foreign reserves in excess of $2 trillion.

In other words, more than enough to push the tiny gold market around in any way it wishes. Given that much of its reserves are now denominated in fragile U.S. dollars that it would sorely love to replace with something more tangible, and that China is the world's largest gold producer, the country's involvement with gold is something more than just a passing fancy.

Simply, there is a new gorilla in the room in global gold markets. The extent to which the broader market hasn't yet figured this out is the extent to which you as an early mover can ultimately profit. Especially in the more leveraged gold stocks, which continue to be strong even as the broader markets show weakness.

That all of this comes before the dollar hits the wall it must hit, or before the inflation that is now baked in the cake arises, lends a lot of credibility to the idea that when the gold bubble begins to expand, it could reach all the way to the moon.

No need to chase gold at these levels, as opposed to buying on dips. But buy.

This post has been republished from Steve Sjuggerud's blog, DailyWealth.

1 comment:

Unknown said...

I agree with the premise of this article, that China's role in the gold and silver markets is a big game changer in a positive way. But I find it strange that at the end he says not to buy at these prices, but to buy on dips. I find this to be somewhat vague and confusing.

Nevertheless, I also like gold very much as an investment for many of the fundamental reasons already laid out, plus the Fed's money printing efforts to try to stave off deflation. I recently came across another good gold price site, which further discusses China's role in the market, along with news and analysis on how specific mining companies may benefit from a continued rise in the gold price, and thoughts on how the upcoming economic events such as the G20 meeting and the Fed meeting may affect the markets.