Gold: Buy China's Dips

China's $2 trillion in foreign reserves could easily push the gold market around...

INSIDE SOURCES have recently claimed that the Chinese government is actively promoting gold and silver investment to the masses, writes David Galland, managing director of Casey Research.

Some analysts now contend that China can no longer afford to let the Gold or silver price slump. The rationale behind that contention is that with the Chinese government now telling the general populace to buy precious metals, it would be highly problematic should gold and silver subsequently take a nose dive.

In many cases, what a government wants and what ultimately occurs can be wildly different, due to unintended consequences rarely foreseen by officialdom, and because once the masses get it into their heads to break one way or another, government's desires are largely ignored.

"You shall not smoke marijuana," says the government. "Roll me another," says John Q. Public.

But in the case of Gold, interestingly enough, the Chinese government has the means at its disposal to actually do something about prices. Namely, at $1,000 an ounce, the total value of all the gold ever mined comes to about $5 trillion.

Of that amount, less than $1 trillion is held in official reserves, the rest under mattresses, in jewelry and family heirlooms, and in various Gold ETFs – GLD being the biggest, by far, holding about $34 billion worth of gold in trust.

Against these totals, China has total foreign currency reserves in excess of $2 trillion. In other words, more than enough to push the tiny gold market around in any way it wishes. Given that much of its reserves are now denominated in fragile US Dollars that it would sorely love to replace with something more tangible, and given that China is the world's largest gold producer, the country's involvement with gold is something more than just a passing fancy.

Simply put, there is a new gorilla in the room in global gold markets. The extent to which the broader market hasn't yet figured this out is the extent to which you as an early mover can ultimately profit. Especially in the more leveraged Gold Mining stocks, which continue to be strong even as the broader markets show weakness.

That all of this comes before the Dollar hits the wall it must hit, or before the inflation that is now baked in the cake arises, lends a lot of credibility to the idea that when the gold bubble begins to expand, it could reach all the way to the moon.

There's no need to chase gold at these levels, as opposed to buying on dips. But do buy those dips is our view right now.

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