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China Going for Gold
08/24/2009 12:01 am EST
The rising superpower is mining and buying bullion as never before. But gold bulls will need patience, writes Lawrence Roulston in Resource Opportunities.
The US is facing persistent problems that will not go away any time soon. On the other hand, the American economy is not about to roll off a cliff, either. A more likely outlook is for an extended period of muddling along. The government debt keeps piling on as support is given to keep companies afloat. (At least some of those companies should be allowed to go under so that the assets could be rolled over to more competent managers. But that is another story.)
While the US struggles to keep inept bankers in their high-paying jobs, the rest of the world is moving on a different path. Economic stimulus in other places is building infrastructure that will generate higher levels of economic activity in the future. The US plan, at best, will put the economy back where it was. Other places are taking action that will see their economies move forward as recovery gets under way.
Some investors and commentators are growing impatient that the gold price has not yet reflected the difficult situation confronting the US dollar. Those people need to recall that the gold price has more than tripled over the past eight years. To expect the gold price to gain any faster is unrealistic. For those with a longer-term outlook, the continued upward ratcheting of the gold price over time represents a key to big profits.
Investors are only a part of the gold market. Indian consumers have sharply cut back on purchases of gold. At the same time, Chinese consumers, flush with cash from an economy that continues to grow at 8% per year, are buying more gold jewelry than ever before.
Gold production in China has soared over the past few years, putting that country in the number-one position among gold producers. Recent figures from the World Gold Council have now given China the distinction of also being the world's largest consumer of gold. The ongoing strength in the Chinese economy has put a great deal of spending power in the hands of consumers. As a result, gold jewelry demand in the country has grown even faster than its level of gold production.
There are too many forces acting on the gold market to make a meaningful prediction in the near term. In the meantime, companies that are finding and developing gold deposits are being warmly received by investors. Gains on those companies are providing action in the near term, while giving investors a long term stake in the gold market. When gold finally satisfies the predictions of the super bulls, the gold juniors will be at the leading edge of that move to higher prices.
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