The Red Dragon’s Golden Breath

There’s some compelling data coming out of China this month about gold and silver. As you’ll see, it paints a very bullish picture.

  1. According to the General Administration of Customs in China, the country’s net imports (imports minus exports) of silver quadrupled in 2010, to 122.6 million ounces. This equals 13.7% of global silver production. This is especially noteworthy when you consider that China was a net exporter of silver for decades, and only became a net importer in 2007.
  2. Several analysts are reporting that demand for physical gold and silver this month has been surging. This is largely due to the start of Chinese New Year, which begins on February 3 and ends on the 18th. Orders have been described as “phenomenal” and shipments as “heavy.”
  3. The operating profits of China National Gold Group Corp, the country's largest gold producer, hit 3.2 billion yuan (US$483 million) in 2010. This is more than five times the profit of 2006.
  4. China Investment Corp., the country's sovereign wealth fund, is opening an office in Toronto, only its second outside the mainland. The reason seems clear: they want to diversify their reserves by investing in Canada's natural resources. The CIC has $300 billion to spend.
  5. According to estimates from the Ministry of Industry and Information Technology, gold production will be 8% higher in 2010 than the year prior. The numbers aren’t final yet, but the agency predicts mainland production will hit 11.9 million ounces. China is already the world's largest gold producer.
  6. When you add China’s mine production to imports, the final tally on the country's overall gold consumption in 2010 will likely reach 21 million ounces or more. This is roughly one-quarter of worldwide mine production.
  7. Just prior to his meeting with President Obama, Chinese President Hu Jintao called the U.S. dollar-dominated currency system a "product of the past" and described moves to turn the yuan into a global currency.

The conclusions to draw from the data are nothing new: gold and silver production continues growing; demand, including from Chinese citizens, continues rising; and diversifying out of the U.S. dollar is a major priority.

And when you consider the baked-in-the-cake inflation that has yet to hit, along with the ultimate direction of the U.S. dollar, these trends are not going to change anytime soon.

I think this quote from Cary Pinkowski, CEO of Astur Gold, sums it up pretty well: “It’s really simple,” he said. “China banned gold ownership for most of the 20th century, and that’s over. China has a savings rate of more than 30%, and an official inflation rate of 10%.” No wonder they’re buying.

One could argue that you can’t reach any solid conclusions about precious metals without looking at China. If that’s true, the bull market in gold and silver is far from over.

To whatever extent you agree that the trends in China are a valid indication of gold’s future for at least the next few years, buying any dip in price seems a pretty safe bet.

About the Author

Senior Editor, Casey's Gold & Resource Report
info [at] caseyresearch [dot] com ()