In recent years, China has quietly and methodically become the biggest player in the gold market.
The year is not over yet, but it already looks like China’s gold imports for 2012 will be the largest in the world – outdoing India for the first time ever.
Then consider that China is now the world’s largest gold producer as well. Last year its annual production crept up to 355 tonnes (from 345 in 2010). That rate of production puts Australia into second place at 270 tonnes.
China is on a mission to increase the size of its national holdings. Therefore NONE OF THIS GOLD LEAVES THE COUNTRY.
The speed they are mining tells you just how important this is to them. With just 6,328 tonnes of mine reserves left, China is mining its gold so fast it will exhaust its known supply in just 18 years…
Now China is importing as much gold as it can, and mining its own reserves as fast as possible, to satisfy its craving, to the extent it has been looking further afield recently.
Chinese gold companies have been buying gold companies all over the world this year.
We have seen this happening right here on the Australian market. Chinese gold company Zinjin has recently taken control of Western Australian stock Norton Gold Fields (ASX: NGF).
Then just last week, Shandong Mining moved on Focus Minerals (ASX: FML).
A few days later, Zhongrun Resources has offered up to $140 million to increase its share of Noble Minerals (ASX: NMG) up to a controlling 51.6%.
What exactly is going on?
In short – China is playing every card it can to secure supply and increase its gold stash.
So, how much have they grown?
That’s the thing, we have no idea.
Most countries update their gold holdings every year or so. But China keeps us in the dark.
We had to wait for seven years for the most recent update, which showed that China had nearly doubled its holdings to 1054 tonnes.
That was 3.5 years ago in April 2009.
Given the huge increase in imports and mine production since then, I’d expect the next increase in official holdings to be a big one.
The Only Reason China is Buying Gold
It’s tempting to have a guess, but it would be just that – a guess. For one thing we have to use official import figures which are almost certainly far lower than the real figures. China wants us to know they are importing, but it serves them to give us a watered down number.
If they aspire to compete with the US official holdings of 8,133 tonnes, then they have a way to go. The component countries of the European Union leave the US in the dust with 15,784 tonnes.
The big question is why is China hell bent on accumulating gold?
Simple – China has been working steadily to launch its currency, the Yuan, as an international currency. To do this, it helps to back its currency with gold.
But 1054 tonnes is simply not enough. If the euro and US dollar are any measure, they will need closer to 5,000-10,000 tonnes. So expect a much, much higher gold price if China seriously intends to accumulate as much as that.
My colleague, Greg Canavan of Sound Money. Sound Investments, makes another interesting point. When China finally announces its new official holding, if it is a real ‘shock and awe’ upgrade, then gold will inevitably ‘gap up’ in price on the news.
If the news comes on a weekend, as China likes to do these things, then gold could jump 25%, 50%, or 100% between Friday and Monday. In Greg’s words:
‘In effect, wealth would instantly transfer from bondholders to gold holders.‘This revaluation would neutralise the losses China would incur on its FX reserves.
It would also provide a windfall for all the Chinese citizens who took The Party’s advice and accumulated gold and silver…thus offsetting the outrage resulting from the loss on the $3.73 trillion dollars of US debt sitting in its banks.
‘If China plays it right, it might just manage to maintain a stable society…and change the rules of the global financial system to its benefit.’
This could be a few years away yet. We waited seven years for the previous update, and it’s only been 3.5 years since then. But it’s a very bullish theme driving the gold market over the medium and long term.
Gold to Double?
In the short term we now have the Federal Reserve’s QE3 program. I wrote to you last week about what the latest round of money printing could do to precious metals prices.
In short – gold could reasonably double; and silver could rise even more.
I’ve tipped gold stocks intermittently for Diggers and Drillers readers over the years. However the recent set up for gold stocks is the best I’ve ever seen.
It’s so good that I’ve now tipped three new gold stocks in just six weeks. These are already sitting on good profits. The first is up 28% since late August, and the two stocks from just last week are on 8% and 12% already with plenty left in the tank.
But the favourite part of my job is actually getting to the mines. I put a lot of emphasis on getting my boots on the ground and having a look for myself.
When researching stocks, I firmly believe you will only ever know what’s really happening if you get on a plane, visit the mine, and have a look for yourself.
Sometimes the flashy company website simply doesn’t match the reality. You have to see the equipment, put your boots and hardhat on and get to the mine face, and most importantly meet the people making it happen. I can tell you this approach helped me dodge a few bullets in recent years, and it has also confirmed some potential winners.
Most recently I flew into outback Western Australia, to take a look at a great looking gold miner that has traced an epic turnaround story.
I took some footage on my visit so you could see exactly what I saw. If you’ve ever wondered what a fully operational gold mine, a million dollars of liquid gold, or outback gold exploration looks like – click on the picture below to enjoy the short video.
Diggers and Drillers Site Visit to Australia’s Best New Gold Stock
Dr. Alex Cowie
Editor, Diggers and Drillers
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