As Bloomberg reported on Saturday, China is preparing to offer a gold-focused ETF on its Shanghai Exchange. The Chinese have always been gold bugs, and China is both the world’s largest gold producer and the world’s second-largest gold consumer (after India). China’s current inflation has probably increased that gold lust – inflation is so acute that the Chinese government has decided to cut growth (its greatest economic achievement) to deal with the issue. However, the desire for gold is also embedded in China’s culture, where (as in India) it has always represented a dependable store of value in turbulent times, when reliable paper currency was non-existent.
The new fund is likely to become a very significant factor in the world gold market. The elliott wave seven-year old SPDR Gold Shares ETF (GLD) has already become a major player in the world’s gold markets, with 1,201.95 tons of gold held in the fund and a value of more than $58 billion. A China analogue gold ETF would add an easy vehicle to meet mainland Chinese investment demand. That new ease would probably stimulate additional gold demand, rather than merely satisfy it.
In the first three months of this year, Chinese gold investment demand jumped 123 percent, to 90.9 metric tons, according to the World Gold Council. Total consumption (including jewelry) is up 47 percent from a year ago, to 233.8 tons. That lags behind India’s 291.8 tons, but total Chinese demand will double before long.
The demand is supported by China’s government and private industries: Chinese banks are opening gold-sales services, and China’s government has gone so far as to run television commercials proclaiming the virtues of gold as an optionbit investment.
In other words, this new ETF is a clear indication that despite gold’s current historic highs, it’s nowhere near its peak, nor is it a bubble ready to burst. Instead, global demand is still growing – and prices are likely to follow.
For years now, the US government has been trying to persuade China to let its currency, the yuan, gain value. And China’s answer has been, “Yes, but slowly, when it suits our interests.”
Frankly, I have no doubt that China wants a strong yuan. It’s the only way the nation will be able to buy all the cheap raw materials it needs to complete its massive infrastructure plans. But I’m also glad it’s taken its time so far. Because that gives investors like us the chance to get in on the bargains of the century. I’m talking about the strongest companies in the fastest-growing region of the planet.
If you haven’t invested in China yet, you may have to hurry, because while China’s yuan is slowly gaining value, the US dollar has been dropping like a stone. Since last summer, the US Dollar Index, which measure the dollar against six of the world’s major currencies, has plunged from 88 down to 76 – a 16% drop.
As the greenback falls, it reduces the buying power of every dollar in your wallet and the value of every security or property you own that’s denominated in dollars.
The best way to protect yourself against the dollar’s on-going swan dive is to move some of your savings out of the dollar and into the currencies of stronger economies. And the strongest economy today is China.
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