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Why China Will Continue to Drive Gold Higher

By David Vaughn     Printer Friendly Version
August 20, 2004

www.freebuck.com

Gold continues to do well.

As time passes that 400 ceiling is making every effort to become a floor. While this year seems to drag on this inevitable slow consolidation period is necessary before gold continues its longer term trend climbing higher. And further evidence of gold’s unending battle to conquer 400 as a floor for the gold price…

“If gold is able to conquer 403 I expect a quick move to 405.00 with potential to climb to 411.00…” Scotia Mocatta, 8-17-2004

How about that! Gold continues to show more strength with each passing day! And look at the headline below.

“Nevertheless, barring sudden strength by the U.S. dollar, bullion prices are likely to remain solidly underpinned by support at US$400/oz, US$398 and US$395, traders and analysts said.” Nicholas Sinclair, Dow Jones Newswires, 8-19-2004

The world is definitely turning to gold. What is that old saying? Every dog has his day? Well, as time passes gold will have many, many more very favorable days. Too many growing financial problems & there must be one stable currency for the world to trust. The world is a dangerous place & is becoming more so every day. And if the world has you frightened & worried the following story may even frighten you more.

“JENNA CAUGHT IT. JENNA CAUGHT THE FISH!”

“Bush shouted to journalists from his father’s boat.” Scott Lindlaw, Associated Press, 8-7-2004

Our world is becoming a more treacherous place. But in the middle of all these crises I feel comforted & at peace to know that “…JENNA CAUGHT THE FISH…”

And more?

“Rods & reels in hand, the family set out together in the morning on the Fidelity III, the new powerboat. Three 275-horsepower engines rumbled beneath the boat, which can reach speeds of up to 75 mph.” Scott Lindlaw, Associated Press, 8-7-2004

Yes, good to know that while our sons & daughters are dying in Iraq that Bush is making every effort to make certain that there will be a continued need for all that Iraqi oil as he powers up that new speedboat with not 1, not 2, but 3 - 275 horsepower engines.

And I know the fishing & boating industry is happy as they watch Jenna catch her fish & observe Daddy riding off into the sunset in his gas guzzling power boat.

“Earlier Saturday, several family members climbed onto the family speed boat for a fishing expedition. One of President Bush’s twin daughters reeled in a 38-inch striped bass, the president announced.” Scott Lindlaw, Associated Press, 8-7-2004

And don’t you dare give me any grief for bashing Bush since you let me get away with bashing Kerry last week. I think all of us should take every opportunity to whack our leaders & leader wannabees. It keeps them (hopefully) humble.

But let’s talk about China & gold.

I know the subject of China & Asia is probably beginning to bore you. Very repetitive message it seems. The same ole’ story over & over again & retold by every writer under the sun. But do you think the sailor should ever tire of looking at the light house?

Focusing often on China & Asia may bore you to tears but what is unfolding in that part of the world will probably grow to have a very considerable impact on both your life & your children’s lives for the next several generations.

And when we discover something influencing profoundly our children’s future welfare & prosperity then its best to listen again & again & again…& then again if necessary.

“TENSIONS RISE AS ECONOMIC POWER TILTS” James Cox, USA Today, 8-11-2004

And?

“China spends its dollars on U.S. Treasury securities, and, by doing so, helps keep interest rates down for American borrowers.” “That’s good, right? Not necessarily, says Jeffrey Garten, dean of the Yale School of Management. “IT’S A SWORD OF DAMOCLES OVER THE UNITED STATES. We never want to be in a position where any foreign government has so much influence over our interest rates,” he says.” James Cox, USA Today, 8-11-2004

Now here is an interesting point. Most folks in this country are apathetic to China’s growing potential strangle hold on the U.S. & do you ever wonder why?

“The USA is the world’s largest economy, with annual output of $11 trillion. China, No. 2 at $6.5.trillion, is the fastest-growing economy, barreling ahead at average annual growth rates of 9% a year. IN 2002, CHINA SURPASSED THE USA AS THE WORLDS LEADING DESTINATION FOR FOREIGN INVESTMENT.” James Cox, USA Today, 8-11-2004

The U.S. doesn’t seem too concerned about Chinas growing economic might. Maybe the U.S. of A feels that if the competition just gets too tough we’ll just go over there with a few troops & guns & bring the country under submission.

“Yet China isn’t emerging so much as re-emerging. The Chinese economy outperformed Western Europe’s for more that 1,000 years, until the 16th century.” James Cox, USA Today, 8-11-2004

Yes, while our ancestors in Europe were living in squalor during the Dark Ages China was a technological marvel whose people were living with an extremely high standard of living. And when Marco Polo returned to Europe to tell of the fantastic sights & innovations he had seen there every European thought he was a liar & nuts.

China today is RE-EMERGING as a super power.

“By 2020, China will have a middle class of 200 million, vs. 186 million for the USA, says Ming-Jer Chen, a business strategy expert at the University of Virginias Darden Graduate School of Business Administration. At that point, he predicts, Americas service-based economy will find it is COMPETING ON NEW FRONTS WITH THE CHINESE – battling for dominance in banking, insurance, telecommunications & other service industries.” James Cox, USA Today, 8-11-2004

And more?

“American manufacturing workers earned an average $16.14 an hour in 2001. Their Chinese counterpoints earned 61 cents a hour…” “If anything, Yale’s Garten says, CHINAS IMPACT ON THE U.S. ECONOMY IS ONLY GOING TO GROW. The two countries will struggle to make room for one another, he says.” James Cox, USA Today, 8-11-2004

Let’s read that last text again.

“THE TWO COUNTRIES WILL STRUGGLE TO MAKE ROOM FOR ONE ANOTHER…”

This kind of reminds me of the story of ancient Carthage & Rome. One super power lived in the West & the other super power maintained its empire in the East. And for a long while the two great powers traded with one another & made money off of one another. But as time passed the two growing & expanding powers began to compete for the same limited resources & profits.

And that is the situation we are going to find between China & the U.S. Our resources (including oil) are quickly being used up & the time is not long before the competition intensifies greatly & it becomes more difficult to share.

“We’ve never been exposed to an onslaught of this magnitude,” he says. “And what were seeing now are just the initial convulsions.” James Cox, USA Today, 8-11-2004

And what does this have to do with gold?

Well, for one the Chinese understand & appreciate the value of gold even more than we do here in the west. In just the past several years the Chinese have been making every effort to build up their gold mining industry & they have been seeking western technology & western dollars to accomplish this goal.

The text below illustrates China’s official policy to do everything in their power to build & strengthen their gold & silver mining industry.

“China welcomes foreign investment in its gold production, according to an official with the State Economic and Trade Commission (SETC).” - click here

And listen to the following very important fact below.

“CHINA'S INDUSTRIAL AND PUBLIC DEMAND FOR GOLD FAR EXCEEDS THE COUNTRY'S OWN PRODUCTION.” - click here

And further evidence of China’s commitment to expand the minerals & natural resources industry.


“According to the Ministry of Finance, the Chinese government intends to take pro-active measures to guide non-governmental capital into the commercial exploration of mineral resources…” “China will strengthen international cooperation and attract more foreign capital to devote to sustainable development, especially with regard to projects relating to the surveying and exploration of mineral resources that are abundant in the country.” - click here

Oh!

Getting back to readers comments the following email is good.

David,

“Yes, UNBELIEVABLE that Delta could be on the skids.”

“NOW, PICTURE THE U.S. ECONOMY AS A DELTA.”

“The real story about a Delta is that it's just a harbinger of what awaits our economy without real change, timely change. AND THE HARD MONEY ISSUE IS JUST AN EFFECT FROM THESE CAUSALITIES, which if the "mainstream" were listening, would dissect & learn from quickly, instead of seeing precious metals as an "enemy"…!”

“Wow, what kind of world will it be without a "Delta."

Best, G.


And the following I ran across a couple of days ago & I just could not pass it up.


“In the new GQ, the Democratic presidential nominee offers relationship advice for men:”

”ON WHAT TO SEEK IN A WOMAN:”


"Look for what gets your heart. Someone who excites you turns you on. ... It's a woman who loves being a woman. Who wears her womanhood. Who knows how to flirt and have fun. Smart. Confident. ... And obviously sexy and saucy and challenging." Drudge Report, 8-16-2004


And John, don’t forget to add that it also helps if that woman is worth a cool billion dollars. But getting back to the title of this article, “Why China Will Drive Gold Higher.”

I guess the main point to understand is that China is opening up the gold market to its people - all 1.5 billion. And to the Asian mentality gold is not a “worthless relic.” Gold is, instead, a very integral & major component to their economic well being & financial stability.

CHINA WILL DRIVE GOLD HIGHER BECAUSE THE CHINESE WANT TO OWN GOLD & THE CHINESE DEMAND FOR GOLD WILL NOT BE MET FROM CHINESE YEARLY GOLD PRODUCTION.

And talking about the Chinese makes me think of rice & other starches.

Had some great fresh out of the garden lima beans yesterday at my favorite diner in downtown Greenville. Good fresh cooked beans are kind of like a good steak. If they are fresh enough (just out of the garden) & cooked just right all you need to add is a little butter & salt & pepper. It’s nice to occasionally go to a fancy restaurant, but the best eating day to day are beans, fresh hot out of the oven cornbread dripping with melting butter on top & home made fresh tea with a lemon slice.

Appropriate & nutritional eating habits are something else we could learn from the Chinese. They eat sensibly & you don’t see many fat Asians. Smart folks really.

Probably the strongest piece of writing that has come out recently supporting a strong powerful gold demand by the Chinese is an article in Mineweb.com. Now at first glance this article appears to question the Chinese demand for gold. But under further analysis the article really supports a very positive & strong Chinese demand for gold.

And remember, Mineweb editors do not wish to be considered journalists, but they are analysts. And when an analyst writes for public dissemination their goal is to make their readers think & to use their brains.

Witness the following quote.

“…if the PBC (Chinese) wanted to increase its gold reserves to a significant level, the gold market is not physically large enough to allow that without a major reaction.” Peter Gonnella, Mineweb.com, 7-10-2004

Now everybody & their brother & every idiot in town knows that the Chinese are rapidly becoming over populated with American greenbacks. Everyone also knows that China will eventually have to begin selling some of these vast US dollars they hold in their reserve & replace these dollars with gold. And again, what does the article text above say will happen when the Chinese begin selling dollars to be replaced with gold?

“…A MAJOR REACTION…”

Yes, & a “…MAJOR REACTION…” with the gold price shooting for the stars!

But let’s get back momentarily to lunch. Went back to the diner next day – fresh picked big butter beans on the menu! Good eatin’! If everybody in this country would just eat a big bowl of butter beans every day we wouldn’t need all that Arab oil.

Sat down at the counter next to an old & distinguished black gentleman.

Albert Davis was his name. He kind of reminded me of Morgan Freeman. And Albert has been coming to Gene’s Diner for over 45 years. Remembers back in the early 60s when Gene’s was the only diner in town that served black folks – at the back door only. Thank God times do change & sometimes very much for the better.

And let’s delve further into the real facts about Chinese gold demand.

“…trading in gold is expected to become a crucial investment arena for Chinese individuals.” Xinhua, ChinaDaily.com, 12-5-2003

Now pay attention to the fact here that these news quotes are coming from Chinese news sources. And who would know better than the Chinese themselves about their desire for gold?

“A recent questionnaire by the Beijing Gold Economic Development Research center in 10 major cities in China showed 70% of respondents said that they would invest in the gold trade if they had money & over 20% of securities investors would transfer part of their capital to gold trade.” Xinhua, ChinaDaily.com, 12-5-2003

And listen to the following Chinese estimations for gold consumption.

“Experts predicted that nearly 7.5 million (Chinese) investors will try the gold trade while continuing the securities trade in the future. Calculating that each one will invest 10,000 yuan (about US $1,200) of capital, the trade will attract 75 billion yuan (some US $9 billion) of funds in total.” Xinhua, ChinaDaily.com, 12-5-2003

NOW CAN YOU ANSWER THE QUESTION & UNDERSTAND WHY CHINA WILL EVENTUALLY DRIVE THE GOLD PRICE DRASTICALLY HIGHER?

You can bet your bottom fanny gold is heading to the moon eventually & contributing to gold’s climb will be the gold lovin’ Chinese!

Let’s listen to Bill Bonner talk about China. And as always Bill is very much worth listening to.

“Let's see...the Chinese get new factories, jobs, wages, profits, technology, assets, savings, capital, know-how. We Americans LOSE jobs, assets, savings, capital, factories, profits and so forth.”

“THE FOREIGNERS (INCLUDING THE CHINESE) OWN MORE AND MORE OF WHAT USED TO BE AMERICAN WEALTH-PRODUCING ASSETS.”
Bill Bonner, Daily Reckoning, 8-18-2004

Now to really put in perspective how China is growing in wealth & how wealth in the U.S. is declining absorb the following.

“When Ronald Reagan arrived at the White House, foreign-owned U.S. assets were less than 15% of GDP. NOW, THEY'RE OVER 78%. And they're growing rapidly. Net purchases of U.S. assets by foreigners rose to $71.8 billion in June, up from $65.2 billion in May. Most of that was in U.S. Treasury bonds. And most of those were purchased by Japan and China.”
Bill Bonner, Daily Reckoning, 8-18-2004

Wow!

If these facts do not help you to understand & to interpret growing “trends” then I do not know what will!

“This puts the U.S. economy - and even its elections - largely in foreign hands. IF THE CHINESE OR JAPANESE SHOULD DECIDE TO SELL TREASURYS, FOR EXAMPLE, IT WOULD CERTAINLY BOOST INTEREST RATES, pop the housing bubble and likely cost George W. Bush the White House.” Bill Bonner, Daily Reckoning, 8-18-2004

And just how historically important are these trends?

“… Asian growth is being driven by industrialization and related development in China and India as dramatic as the transformation of the United States in the 19th century from a small colonial economy of 4 million people to the world's largest economic power." Bill Bonner, Daily Reckoning, 8-18-2004

Hopefully, after exploring these facts all of us can see a future correlation to gold & China. And if we have any common sense we will have to ask ourselves why we may not yet be invested in this gold market.

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August 20, 2004

***

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