Thread: Chinese Government to Citizens: Buy Gold and Silver

Chinese Government to Citizens: Buy Gold and Silver

By Dr. Jeffrey Lewis
Mar 4 2010 3:43PM

No longer favoring the US dollar, the Chinese government increased its holdings of gold from 600 tonnes in 2003 to 1,054 tonnes in 2009. This month, rumors began circulating that the Chinese government may indeed purchase from the IMF 191.3 tonnes of gold. While the government has denied this rumor, China Investment Corp. has purchased positions in gold miners such as Canadia’s Kinross Gold, Gold Fields of South Africa, and AngloGold Ashanti.

To further fuel gold investment, the government began pushing its citizens to buy gold in September of 2009. In addition, China just introduced its own silver bars as an investment, and China Central Television is running campaigns to push the citizenry into gold and silver investments. This could mean a new swell of demand and higher prices.

New Steps in Precious Metal Ownership

Besides the new ad campaign, China is taking larger and larger steps to solidify its wealth with a huge stake in precious metals, going so far to encourage private ownership. The Ministry of Land and Resources has also rewritten mining laws to encourage existing mining operations to look for gold and silver both in the mainland and overseas. This move, coupled with a ban on silver exports, makes it clear that China wants its hand in the oncoming precious metals rush.

A New Exchange

China has even gone so far to create the Shanghai Gold Exchange, which allows anyone to trade gold in the open market with very little government intervention; this is a dramatic shift from the historic communist leanings of the Chinese government. This new market could open ownership of gold to a growing middle class that saves as much 40% of its personal income, creating a force to be reckoned with in the international and domestic gold markets.

China's Impact on Metals

Though we have known for the last few years that China's government is seeking to minimize its exposure to foreign currencies, especially the US dollar, it is now clear that the country wants to mobilize its citizenry to do the same. This couldn't be more bullish for both gold and silver, as a new generation of Chinese savers is sure to enter the market place, driving up the price of metals and spreading gold and silver as an investment well beyond government controlled coffers.

Don't Discount the Chinese

Historically, the Chinese have exerted very little impact on speculative investments; however, times are certainly changing. As China's trade surplus grows due to its enormous manufacturing base, the amount of money both in the hands of government and in the hands of the citizenry is sure to follow suit. Just recently, a new class of Chinese citizens clad with personal computers, cell phones and personal transportation is taking a foothold in China, and they are not afraid to invest their immerse wealth where they see fit.

The Time is Now

While the current ranks of investors choosing to protect themselves with gold and silver remains a very small portion of the total investing class, the ranks are growing – all while the amount of precious metals stagnates. Anyone with a calculator and a basic understanding of economics understands that today's prices, though multiples higher than a decade ago, are sure to explode, mostly due to the number of investors who want to own gold and silver.

There is no better time to begin establishing a position. Do so before 300 million middle class Chinese citizens begin to stake their claim in what is sure to be a multi-decade bull run in commodity prices.

Don't Let Analysts Skew Your Metals Portfolios

Every time an investment outperforms much of the market, the entirety of the financial services community reaches in to offer their two cents. We saw this in real estate, the bull run in commodities throughout the early 2000s, and in many high performing investment sectors before these booms.

However, it is important to keep a level head when the pundits and financial commentators start buzzing about the next best investment.

What Analysts’ Projections Really Mean

What do the analysts’ projections mean? Nothing.

Analyst forecasts about a specific investment or security mean virtually nothing about the future returns of a security, commodity or any other investment class. These statements and predictions are released largely for the press value and free advertising large investment banks receive every time they make a forecast about an investment.

If you remember back to the oil bubble, two companies in particular, Goldman Sachs and JP Morgan Chase, made a new prediction each and every week as oil went higher. This was done for three reasons: to increase the interest in oil, as well as work as a self-fulfilling prophecy to drive oil prices higher and to bring their company to the main stage of financial commentary with each new release.

Most of their predictions came true, but this wasn't due to any amazing forecasting on their part. Instead, it was due to the fact that the investment banks were making forecasts that anyone with a chart could plainly see.

Also, each new forecast was rarely more than 10% higher than the previous forecast, allowing the bank to claim it had placed appropriate target prices each time one was reached.

Analysts Lining up in Precious Metals

Ultimately, the oil bubble popped as the economy turned sour, and the last of all predictions was the only one to prove untrue. JP Morgan had been correct all the way to nearly $150 per barrel before it released a ridiculous forecast of $200 per barrel, and it was only weeks later that the oil bubble came crashing down. Of course, the investment banks were already selling to the new interest, and just a few weeks before the bubble burst, most were again short oil, which is a complete 180 from their own forecasting.

Now investment banks are doing just the same with gold, putting out ridiculously low price targets of $1300, which almost anyone with experience in metals knows is still exponentially lower than its inflation adjusted high.

Noise Only

Financial analysts are in the marketplace to make noise to excite investors about the next greatest investment. They're not there for any meaningful purpose, and most really don't care which way the investment itself chooses to go. The analysis division is mostly there for positive press, and each time the investment strikes a forecasted target price, the investment bank has the ability to inflate its own ego.

It is important to remember to never get caught up in what analysts are predicting about precious metals because they know little more than the average investor who can read charts and understand economic fundamentals. We can all agree that government spending is out of control, inflation is continuing on, and the underlying fundamentals for precious metals remain strong. With that said, it would be ridiculous not to predict higher metal prices for the long term horizon.

Dr. Jeff Lewis

http://www.kitco.com/ind/Lewis/mar042010.html

On the extreme Hugo Salinas predicts a price of US 20,000