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China's Growing Credit Signals Rising Gold

Long-term, the rising tide of credit in China is a problem. Not for gold...
 
I THINK it's interesting how people, including the mainstream media, discuss an issue without truly understanding what it really means, writes Sasha Cekerevac at Investment Contrarians.
 
It seems that skimming the surface is good enough these days, as no one seems to want to dig a little deeper.
 
One example is the recent reports from Chinese Premier Li Keqiang, who stated that the Chinese economy must grow at least 7.2% per year in order to limit the unemployment rate at four per cent.
 
As we all know, the Chinese economy is extremely important. As the second-largest nation in the global economy, its ability to manage the Chinese economy and prevent it from weakening further is quite important.
 
China's Premier warned against creating even easier monetary conditions within the Chinese economy, as additional money printing could lead to even higher levels of inflation. Currently, the total credit supply is now in excess of $16.4 trillion (or 100 trillion Yuan), approximately twice the size of its entire Chinese economy.
 
With the global economy still quite weak, China has had trouble exporting. It is now trying to transition the Chinese economy from export-led to domestically oriented, reducing its reliance on the global economy.
 
At least, that's the story on the surface...
 
Here's what troubles me: the Chinese economy is slowing, we all know that, yet all of its money printing so far has led to a total amount of credit supply twice the size of its entire economy.
 
So, what has all of this money printing really done?
 
It's caused people in the Chinese economy to react by essentially trading their paper currency for hard assets like real estate and gold bullion. They don't know how long the paper money will hold its current worth as inflation continues rising; therefore, they are rushing to trade it in for something solid, like gold bullion. And we all know that China is one of the biggest buyers of gold bullion.
 
And as much as they would like to see lower levels of inflation, the main goal for the leaders in the Chinese economy is to prevent unemployment. Even if that means printing money, they will continue to do so. That means continued buying in hard assets.
 
What happens when it all ends? 
 
It's difficult to say, and timing is always tough to call. Can the total credit supply increase to three times or four times the size of the Chinese economy? Perhaps, but I foresee those business people involved in profiting from the excess money supply will continue to trade their paper Yuan into gold bullion and other hard assets.
 
Because the situation in the global economy is weak and the Chinese economy continues to undergo change, the one constant is that gold bullion will remain valuable.
 
The Chinese government has also been using the wealth created from selling goods to the global economy to buy gold bullion.
 
With our debt levels continuing to grow, I think many nations are going to become concerned with our ability to actually pay them back. China already owns trillions of Dollars of our debt; I doubt it wants another trillion. So from a diversification viewpoint, it makes sense for the Chinese to look at alternatives to US Treasuries, and gold bullion certainly fits the bill. 
 
While the price of gold bullion has dropped, one has to view price action over a long-period of time. Day-to-day and quarter-to-quarter price movements can be volatile; look at the actual demand for physical gold bullion instead.
 
Will China (and other nations) continue to buy or sell gold bullion? They're buying, and they're using this pullback in gold bullion prices to continue accumulating. For the long-term investor, I would follow China's lead and use this pullback to buy gold bullion, as I believe the demand from China for gold bullion will continue to grow over the next decade.

Investment Contrarians is a free financial e-letter whose editors believe the US stock market and the economy have been propped up since 2009 by artificially low interest rates, never-ending government borrowing and an unprecedented expansion in the money supply. They question 'official' unemployment and inflation numbers and argue that rapid inflation caused by huge government debt and money printing will see interest rates, which have seen a quarter-of-a-century of falls, begin a new upwards cycle.

See full archive of Investment Contrarians.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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