China Promotes Gold Ownership

By Patrick A. Heller August 06, 2010

Over the past several years, the government in China has set up infrastructure to enable the nation’s citizens to purchase physical gold. It has also periodically issued pronouncements urging the public to buy gold. During this time, the Chinese government has been a stronger advocate of the private ownership of gold than any other country. 

This effort to increase domestic demand is above and beyond the huge amounts of gold that China’s central bank has added to its reserves since 2003.

One thing you have to keep in mind about the potential demand for gold in China is that there are not the social (government) safety nets as there are in the United States.  As a result, the Chinese save more than 50 percent of their income as “insurance.” Compared to the typical American, the average Chinese citizen has a huge amount of funds available to allocate to purchasing gold.

There have been significant problems with Chinese citizens being able to acquire physical gold. There are simply too few outlets carrying insufficient inventory.  From 2007 to 2009, private physical gold demand in China quadrupled from almost 580,000 ounces to more than 2.3 million ounces. I have heard multiple stories of people having to wait in line at gold stores for as long as four hours in order to make a purchase.

On Aug. 3, the People’s Bank of China announced several developments to broaden access to gold for private citizens and increase competition in the markets.

According to a statement posted on the PBOC website, more commercial banks will be authorized to import and export physical gold.  In addition, the banks will be encouraged to offer yuan-denominated gold derivatives, which would provide paper evidence of the ownership of some of the rights of owning physical gold.

The PBOC also promised to improve policies with respect to the gold market.  For instance, it will improve policies to speed development of foreign exchange activities. Until recently, it was technically illegal to take yuan in or out of China, though I have talked with a number of people who have traveled there who said that the customs people never asked about transporting Chinese money.

The central bank has instructed commercial banks to provide better services in loaning funds to domestic gold companies looking to establish foreign branches.  In turn, the PBOC will further open the Chinese market to foreigners who wish to trade gold there.

The PBOC also said it was considering allowing foreign suppliers to provide physical gold directly to the Shanghai Gold Exchange.

The end result of these changes is that there will be more physical gold available for sale and more outlets where people can go to purchase the yellow metal.

The bank further stated that it would strengthen supervision of the gold market to ensure balanced development (with the definition of balanced development left up to the Chinese government).

China is already the world’s largest gold producing nation, but domestic physical gold demand is much higher than domestic supplies.  As years pass, expect gold imports into China to continue to grow.

Another item:

Last Friday, the jobs and unemployment report released by the Bureau of Labor Statistics as so poor that, for only about the third time in the past 50+ months, gold and silver prices rose at the time the report was issued.

That the prices of gold and silver were “allowed” to rise this particular time is one more sign that the U.S. government may be running out of ammunition to use to continue to suppress prices.

As I have explained before, one way the U.S. government overstates employment has been with the use of a birth/death adjustment. After counting the changes in jobs, the BLS then pads the number of employed workers simply because the population of the U.S. has increased.  Even though the statisticians at the BLS acknowledge that this double counts new jobs, they still do it. Once a year, most recently in the January 2010 report, there is a major correction in the adjustment to undo the error that has crept in over the past year through applying the birth/death adjustment.

In the previous three months, there were huge numbers of fictitious jobs added through use of the birth/death model (188,000 for April, 215,000 for May and 147,000 for June) which helped make it possible to report that the unemployment rate was stable instead of deteriorating.  There were so many Census Bureau positions eliminated in July, against other anemic employment data from the private sector and other government sectors, that I suspect that the BLS didn’t want to “waste” another large fudging of the reports. Consequently, the July birth/death model in total only added 6,000 jobs.  This was the lowest adjustment since July 2009, other than the annual correction in January 2010.

Of course, as bad as the July unemployment numbers were, be prepared for revisions later that could make the results even worse. Along with the release of the July numbers were revisions for May and June that showed a further net decrease in employment of 35,000 compared to the original reports that were issued.

As more bad financial news gets reported, that will only stimulate further demand for gold and silver.
Patrick A. Heller owns Liberty Coin Service and Premier Coins & Collectibles (www.premier-coins.com) in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at www.libertycoinservice.com.  Other written commentaries are available at Coin Update (www.coinupdate.com). Heller’s radio program, “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” is broadcast every Wednesday morning about 8:45-9 a.m. on 1320-AM WILS (which streams live at www.1320wils.com, where audio and text archives are also available).