Straws in the wind for gold

Gold news from Tokyo, Beijing and Mumbai points to higher prices ahead...

READERS of the International Speculator often ask why I'm so sure the economy of China is going to continue powering ahead, growing in turn its demand high for commodities in general – and precious metals in particular.

   Rather than bore them with the macro-economics, I usually abbreviate my answer by pointing out China's troubled history – and noting that China's leadership, which today is only communist in rhetoric, is well aware that it's become an anachronism.

   Which is to say that a serious slowdown in the Chinese economy, with its attendant mass unemployment, could quickly turn into a terminal event...politically and maybe even personally...for the Beijing authorities.

   In short, China's leaders will do what they must to keep the economy humming along. And that is to continue putting into practice the lessons so clearly learned in Hong Kong: first and foremost, stay out of the way of the market.

   Put another way, now that the capitalist genie – or more correctly, 1.3 billion genies – is out of the bottle, there's no easy way of going back.

   And as David Galland points out in the essay below, the best way to take advantage of China's explosive growth comes from getting positioned in physical gold bullion – the cultural default for wealth in Asia.

   As you'll read, the signs of China's new golden age are already starting to appear.

Doug Casey
International Speculator

ASIA'S GOLDEN AGE
by David Galland, Casey Research

MORE STRAWS in the wind for gold...a wind coming out of the East.

   On March 29 the Tokyo Commodity Exchange (Tocom), the world's fourth-largest commodity futures exchange, announced the loosening of margins to allow greater daily price fluctuations for gold.

   That move broadens the range by 33% as of April 1. But it was not only what the Tocom did but what they said that caught our attention.

   According to Bloomberg, Shigeharu Amari, the general manager of Tocom's public relations department, said that "Heightened demand for gold in China and India have led to major swings in bullion prices over the past six months, which is why we decided to make the change."

   China's traditional cultural affection for gold, understandable given that country's troubled history, was suppressed by Mao and his cronies for 52 years, until the liberalization of gold ownership in 2001.

   Today, China's affection for gold is being stoked even hotter by concerns over a falling Dollar – and also by a pig. Actually, the rumor of a pig.

   In the Chinese lunar calendar, 2007 is the "year of the red pig" – purportedly a very auspicious year. Better yet, it is also widely rumored to be the "Year of the Golden Pig".

   According to Chinese fortunetellers, this only comes around once every 600 years.

   The new lunar calendar kicked off on February 18, 2007, but even before the starting gun, the pick-up in Chinese gold sales was apparent. In 2006, according to the China Gold Association, gold consumption grew by 17%. Toss in a golden pig, and things get a lot more interesting.

   Even though China's annual gold production is forecast to reach 260 metric tonnes this year, it will fall about 100 tonnes short of meeting Chinese demand. The Shanghai Gold Exchange, China's only precious metals trade platform, noted a gold trading volume of nearly 130,000 kilograms in January – a rise of nearly 73% over the same period last year.

   For the other great contender in Asia's economic boom – India – gold jewelry has historically played a crucial role. Between 60% and 70% of all Indian jewelry is sold during the wedding and festival season in October and November, and many Indian banks provide loans for purchasing gold jewelry.

   Even though higher prices pushed gold jewelry sales down in 2006, most analysts now see gold in India taking on a larger role. It's becoming an investment for the newly affluent looking to protect their wealth (Indian inflation is running at 6.5%), as opposed to just body décor and a status symbol.

   Speaking of Indian investment, on February 15, the first Indian gold ETF launched, the Gold BeEs of Benchmark Mutual Fund. The second ETF launch, the UTI Gold Exchange Traded Fund, is already underway. Rajesh Bhojani, UTI Mutual Fund's president of marketing, says about 30% of the gold market in India is investors—and we suspect the new gold ETFs are going to dramatically boost that percentage.

   Hopping back to China, anyone with any interest in gold is now aware of the rock-and-hard place dilemma caused by the $700 billion littering China's official reserves. In 2006 alone, the Chinese took about $3.4 billion in exchange rate losses...chump change today, but a clear warning shot of far bigger losses to come.

   Diversifying out of the US Dollar and into a far more diverse basket of assets, including tangibles such as gold, has become a very high priority in China. Yet despite announcing last year that they were starting a new government investment management corporation, the primary purpose being to manage their towering reserves, the Chinese don't seem to be in a big hurry to diversify. Not officially, at least.

   Recently, the Chinese engaged in a bit of carefully orchestrated theater, the purpose of which was to reassure the world's financial community they were not going to rock the boat in an attempt to diversify out of their hundreds of billions of dollar reserves. The show kicked off with Wen Jiabao, China's premier, assuring the market in a press conference that China's new investment regime "would not have any impact on US Dollar-denominated assets."

   The opening act was followed a few hours later by China's central bank when it pulled back the curtain on a report stating that it wouldn't be making "frequent, major adjustments to the structure of the reserves in response to market movements."

   But switching analogies, let's just suppose that the Chinese, rather than being poor chess players, were actually pretty good at the game...and the bright young team now being assembled to manage the diversification of China's massive reserves were actually intent on their task?

   Might the Chinese go out of their way to reassure gullible markets that they weren't going to be unloading Dollars, when they were actually getting rid of as many greenbacks as possible before the broader markets caught on?

   It is certainly within the realm of possibility. In fact, if you look at it through the spectrum of a leadership for whom the "Big Lie" has been an official policy tool for better than half a century, it becomes downright likely.

   That this may be the case is made all the more apparent by the recent news that China had invested $3.3 billion in Blackstone, the US private equity firm. You can rest assured that their investment strategy is far more diverse than just investing in US Treasury bills.

   The global supply of gold is already under pressure. Private investor interest, helped along with hugely popular new ETFs in the US and London – as well as in India among other countries – is meeting strong demand from the institutions and hedge funds now beginning to recall that buying physical gold bullion is a wise move for your portfolio's diversification and spread of risk.

   Throw onto the scale the rising demand out of a booming Asia – plus the very real possibility that the US Dollar has seen its best days – and you have all the pressure you need to see gold heading much, much higher from here.

   How much higher? Impossible to say, but it is worth noting that, on an inflation-adjusted basis, gold would have to rise to $2,276 just to equal the previous $850 high.

   How you play the unfolding gold market will depend on your psychology and temperament...with your choices ranging from straight gold bullion owned outright to the extreme leverage of gold futures on the wild side. Here at Casey Research, we focus on the middle path – choosing higher-quality gold shares that, with some dedicated effort, can be well understood. If they can be understood, then the worst of the risk inherent in trading gold stocks can be eliminated, potentially leaving just the truly explosive upside.

   Whatever approach you take, however, just make sure that you don't procrastinate to the point of missing the boat altogether.

   The Golden Age is upon us.

David Galland is the managing editor of Doug Casey's International Speculator newsletter, now in its 27th year. Dedicated to bringing investors unbiased research on precious metals investments, it looks for stocks with the potential for 100% or better returns within 12 months. To learn more about the International Speculator – and to enjoy a money-back trial subscription offering, click here now...