Gold News

Credit Does Not Equal Gold No.1

Buying gold to protect yours and China's "leftover treasure"...
 
WHERE to keep your savings? asks Adrian Ash at BullionVault.
 
"I'm basically losing money if I leave it as a bank deposit," says one young saver in China to Bloomberg.
 
I guess you know the feeling. UK savers have seen cash-on-deposit shrink 12% in real terms since zero rates and money-printing began five years ago.
 
"It's depreciating in value every day," she says. So like 43 million other Chinese savers, she's chosen to earn 17 times as much interest by switching to a money-market fund instead.
 
Using her phone, in fact. To invest in a fund run by the Chinese equivalent of PayPal.
 
Maybe this is where Western savers and China's fast-growing middle classes split. Oh sure, plenty of people here will throw money into Icelandic or crypto-code bubbles without bothering to learn or understand the risks. But Neo-Capitalist China hasn't yet suffered a financial crash. Whereas in the UK, for instance, financial advisors can't get middle-class savers to take any risks. Or so they moan in a new survey.
 
Never mind that, time and again, client surveys say people want less risk, and more safety than their advisors push. Even though interest rates are on the floor, and set to stay there, people want the safety of cash, without the loss to inflation. You might think "diversification" would sell itself.
 
China's new savers, on the other hand, aren't lucky enough to enjoy the "safety-net" of shrinking state pensions or healthcare. Which is why they save so much of their income...perhaps 31% of take-home pay, or 50% of annual GDP depending on whose guess-timate you pick. It's also why so many of them already buy gold each month with their " leftover treasure" – the name, literally, of major money-maket fund Yu'e Bao. Running $41 billion for 43 million people, it's the largest part of China's $122bn non-banking savings fund industry. Physical gold buying, on the other hand, totaled some $52bn last year alone judging by the latest data from the China Gold Association.
 
The world's heaviest buyers of gold in 2013, private Chinese citizens are expected to be big buyers again after the current New Year holidays. Wholesalers have been back at their desks for three trading days in the Year of the Horse, and they're happy to bid for gold at higher prices this week. Bids for the ultimate money insurance may only grow stronger as well if 2014's economic slowdown pops China's huge credit, savings and real estate bubble.
 
The collapse of (and rescue of 700 investors in) a $500m coal-mining savings vehicle last month looks just the bleeding edge of a truly massive blow out. Its name alone, Credit Equals Gold No.1, begs a place in the financial history books. Because gold, unlike cash or any other financial instrument, is the very opposite of credit. It can't be created at will. No one's bankruptcy can destroy it.
 
Credit never equals gold, number one or otherwise.
 
Further ahead, and whatever happens to China's financial excesses in 2014, "Growth of the Asian middle-class dominates next 20 years" as the OECD keeps putting it. Swelling by 75% to 3.2 billion in the decade to 2020, it believes, the number of people worldwide able to put a little money aside for the future will grow another 50% to 4.9 billion by 2030. "The bulk of this growth will come from Asia," says the OECD. But what will really tilt the world on its axis is Asia's share of middle-class households and spending. Because in 15 years' time, the OECD reckons, Asia will represent two-thirds of the world's middle-class population, up from 28% in 2009. And it will account for almost 60% of middle-class spending, compared to less than one quarter a half-decade ago.
 
Western banks and wealth-management firms know all this, of course. So they're primed to pump Asia's booming middle-classes with lots of new investment products. But even if they pinch a fat share of emerging Asia's emerging middle class wealth, and even if that middle class misses the OECD's growth forecasts by one half, the release of another 1 billion people from subsistence living to discretionary savings will surely hit precious metals demand.
 
Yes, we've shown recently how Asian jewelry and coin demand failed to push gold prices higher. People who buy gold because it is gold do not create bull markets. Only people who buy gold because it's not anything else can do that. But Asia's surging demand in 2013 clearly put a floor beneath the crash. Growing Chinese demand since deregulation began a decade before arguably set a rising floor beneath the rising gold price too.
 
Down around $1200 per ounce, meantime, current gold prices are "close to the cash cost of production for gold miners," as Bernard Dahdah at French investment and London bullion bank Natixis told Reuters Insider Television on Wednesday morning.
 
Or rather, gold is now up at $1290 per ounce, having rallied sharly from that level so far in 2014. Global and especially Asian stock markets have gone the other way.
 
Buying gold to spread your risk, and diversify your wealth, means buying it because it isn't anything else. Which unlike festival, jewelry, coin-collecting or gift-giving demand, is just the kind of gold buying to drive prices higher. Especially when it comes from a billion or two of the world's new middle classes.

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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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