Forbes: Keeping Up With Chinese Gold Demand

May. 24 2011 – 10:34 am
Posted by Addison Wiggin

Monday’s trading was “risk off” as a new week began with markets jittery about the Euro zone again…

  • S&P downgraded its outlook for Italian government debt from “stable” to “negative”
  • Spain’s ruling Socialists got clobbered in regional elections over the weekend , casting doubt on the future of Spanish austerity measures
  • Greece is scrambling to sell off unspecified assets (the Parthenon?) to stave off a “restructuring” (read: stretching out the payments) of its debt.

Ten-year Greek bonds yield 16.98% Monday. In the credit default swap market, traders now give Greece a 68.7% probability of defaulting in the next five years.

The market impact looked like this…

  • The Dow and the S&P both tumbled a little over 1%
  • Oil was off more than 3%, to $96.90
  • Yields on 10-year U.S. Treasuries were down to 3.1%… their lowest all year
  • The euro clung to $1.40… while the dollar index moved decisively above 76 for the first time in a month.

Gold, however, held its own. The spot price was $1,513 – virtually unchanged from Friday’s run-up. Silver was likewise steady at $35.15.

In euro terms, gold reached a record of EUR 1,080 an ounce.

This will be interesting to watch. We could be entering a period much like the first half of 2010 – in which the dollar index ran up 19%… but gold did not fall accordingly. Indeed, it rose 11%… before powering up another 13% by year-end.

The Shanghai Gold Exchange plans to launch exchange-traded funds to help meet demand for precious metals. No timetable yet, but no doubt the exchange’s managers have noted overwhelming demand for overseas gold ETFs – which Chinese first got access to in January.

As we noted last week, China is now the No. 1 source of investment demand for gold – surpassing the longtime leader, India. And the Chinese central bank has a long-term aim of growing its gold reserves eightfold.

Maybe the new “gold as money” law in Utah will have a little more impact than we first thought.

Earlier this year, the legislature passed and the governor signed legislation affirming gold and silver’s status as currency. The only practical effect we saw at the time was precious metals became exempt from state capital gains taxes.

Now along comes an entrepreneur named Craig Franco, who plans to open the Utah Gold and Silver Depository next week. He has no website yet, so we’re left to rely on an Associated Press account that says, “The idea is simple: Store your gold and silver coins in a vault, and Franco issues a debit-like card to make purchases backed by your holdings.”

“I expect a wait-and-see attitude,” Franco says. “Once the depository is executed and transactions can occur, then I think people will move into the marketplace.”

Based on this, we’re not sure how the “debit-like card” is supposed to work… or how it differs from other efforts like those of our friends at GoldMoney.com. But we’ll keep an eye on it.

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