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Have you ever wondered what the typical Chinese gold
investor thinks about our Western ideas of gold? We read month after month
about demand hitting record after record in their country – how do they
view our buying habits?
Since 2007, China's demand for gold has risen 27% per
year. Its share of global demand doubled in the same time frame, from 10% to
21%. And this occurred while prices were rising.
Americans are buying precious metals, no doubt. You'll
see in a news item below that gold and silver ETF holdings just hit record
levels. The US Mint believes that 2012 volumes will surpass those of 2011.
But let's put the differences into perspective. This
chart shows how much gold various countries are buying relative to their
respective GDPs.
It's widely believed that the majority of the gold
flowing into Hong Kong ends up in China, so its total is probably close to
double what the chart reflects. Even if none of it went to China, coin and
jewelry demand is 35 times greater than the US, based on GDP.
The contrast between how our two nations can buy
bullion is striking…
- In China, you can buy gold and silver at the bank.
My teller looked at me oddly when I asked.
- Bullion is available for purchase at Chinese post
offices. I wonder how my local postman would respond if I asked for a
tube of silver Eagles.
- Mints are readily accessible to retail customers.
Here, I can only order proof and commemorative products from the US Mint
and am forced to go to an independent dealer.
- A new product design is manufactured every year.
This being the Year of the Dragon, many bullion products are emblazoned with
dragons. You can still buy last year's rabbit, and next year it will be
a snake. The US has two designs, the Eagle and Buffalo; the latter was
introduced in 2006 and is available only in gold (if you see a silver
Buffalo, it is a "Round" manufactured by a private mint, not
the US Mint).
Some will point to cultural affinity to account for the
differences. There's some truth to that, though this is a much greater factor
in India. Even there, gold jewelry is not viewed as a decoration or an
adornment; it's a store of value. It's financial insurance in a pretty bow.
In India, gold can be used as collateral, regardless of its form. It's not
just an investment that they're trying to make money from; it's more
important than that.
But certainly the differences can't all be attributed
to culture…
You've likely heard how government leaders in Beijing
have been encouraging citizens to buy gold and silver. This would be akin to
seeing your local Congressman or President Obama appearing on TV and
imploring you to buy some gold and silver. (Utah made gold legal tender, but
it was mostly a symbolic move.)
Chinese radio and TV spots, along with newspaper ads,
talk about "safeguarding your wealth" and putting "at least 5%
of your savings" in precious metals. I haven't seen this here except
from dealers on cable TV. Can you imagine Ben Bernanke appearing in a
commercial during American Idol, encouraging you to buy gold Eagles?
No, what I hear from politicians about precious metals
is nothing but the sound of crickets chirping, save Ron Paul. And the
mainstream continues to claim gold is in a bubble. We've pointed it out
before, but in case any of them are reading, there are two criteria for a
bubble: first, a massive price increase, such as the gold price doubling in less
than 7 weeks like it did in 1979-'80... which,
of course, hasn't occurred in this bull market. (Yet.)
The second criterion is widespread participation on the
part of the public. I don't hear celebrities and TV anchors bubbling on about
the latest gold stocks. Most people I know outside Casey Research aren't
talking about the great price they got on a silver Maple Leaf. Most investors
I talk to say their friends, family, or co-workers aren't scrambling to
snatch up gold Eagles. And the #1 reason we're not in a bubble is because Eva
Longoria still hasn't asked me out on date – something she'd only do
because I'm a gold analyst.
And with apologies to those of you who do know history,
I think the Chinese have studied history a little better than many of us. The
lessons are right in front of us, though I don't hear this kind of data very
much on CNBC…
- Morgan Stanley reports there is "no
historical precedent" for an economy that exceeds a 250%
debt-to-GDP ratio without experiencing some sort of financial crisis or
high inflation. Total debt (public and private) in the US is 300%+ of
GDP.
- Detailed studies of government debt levels over
the past 100 years show that debts have never been repaid (in original
currency units) when they exceed 80% of GDP. US government debt is
approaching 100% of GDP this year.
- Peter Bernholz, a
leading expert on hyperinflation, states emphatically that
"hyperinflation is caused by government budget deficits." This
year's US budget deficit will be about $1.3 trillion. It's expected to
total $6 trillion during Obama's first four years in office.
What do we hear instead? That the country will drop
into recession if current amounts of spending and outlay of benefits are
reduced. I think it is quite the opposite; it will be worse if our leaders continue
down this path of debt, deficit spending, and printing money.
What I'd love to see on CNBC is a spot with Doug Casey
saying this: "Anyone who thinks they have any measure of financial
security without owning any gold – especially in the post-2008 world
– is either ignorant, naïve, foolish, or all three." I bet
that'd get the airwaves buzzing.
It must seem strange to many Chinese that we continue
to believe in our dollars, Treasuries, and bonds more than gold and silver.
And it's not just China that would view our investing habits as peculiar.
Indeed, as the above tables implies, our views on precious metals are in
the minority.
My fear is that regardless of what form the fallout
takes, many of my friends will be caught off guard. Probably many of yours,
too. As the value of dollars continues to decay and inflation creeps closer
and closer and then higher and higher, many investors will feel blindsided.
Many Chinese citizens will not.
Given China's aggressive buying habits, my suspicion is
that many of them will probably wonder why we didn't see what was happening
all around us, why we didn't learn from history, and why we didn't better
prepare.
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