China Buying Gold!
Commodities / Gold & Silver May 11, 2007 - 10:48 AM GMT
Larry Edelson writes : I have absolutely no doubt that someday, and soon, you're going to hear that China has been actively buying gold as part of its strategy to diversify its $1.2 trillion in cash reserves.
When you hear that news, every broker and analyst under the sun is going to tell you to buy gold and gold mining shares like crazy.
But don't listen to them because it will be too late. By the time the Chinese admit they have been buying gold, I can assure you, we will be much closer to the top of the gold market than the bottom.
See, the Chinese are never going to publicly acknowledge they've been buying gold until they are done buying. That's just how it is. That's how any central bank would do it.
This is why I have been telling you to buy gold all along. And I think it's also one reason why gold is now making a beeline for new highs. Look at last week's price action — gold initially fell to $684 … but then it went virtually straight up to $700, ending last week at $697 an ounce. I've been trading the gold market for 30 years, and that move smacked government gold buying.
Mark my words: In just a few weeks time, you could be staring at record new highs in gold, over $850 an ounce.
All the ingredients are in place, and today I want to tell you about them. First, a little more on China and gold …
China Needs a Lot of Gold To Catch Up to Other Countries
An estimated 70% of China's $1.2 trillion in reserves, or $940 billion, is invested in dollar-denominated assets, mostly U.S. Treasury bonds.
Bond prices themselves are vulnerable to falling. And with the dollar hitting new lows against most major currencies, why the heck would China wait any more to diversify its reserves? Why would it wait any longer to buy gold?
According to official records, which mean nothing when it comes to China, Beijing has only about 1.3% of its total reserves in gold. That's only 19.29 million ounces of gold, worth a minor $12 billion at today's gold prices.
Meanwhile, the U.S. has 75.9% of its reserves in gold … the Euro region has 24.4% … heck, even tiny Cameroon has more gold in its reserves than China!
There is no way that China is going to sit still with so little gold on hand. In fact, barely two weeks ago, People's Bank of China Vice Governor Xiang Junbo publicly admitted that China should "appropriately increase its gold reserves."
Another economist, He Fan, at the Chinese Academy of Social Sciences, a top government think tank, said the following about gold,
"I think the authorities must have realized the need to raise gold reserves … I think it's appropriate to increase the proportion to 10-15% to match that of some European countries."Let me tell you something: If China increases its gold holdings to just 3% of its reserves, that would be enough to shoot gold to record new highs.
Moreover, China is not the only reason gold is soaring. All the other forces I've been warning you about in the gold market are getting stronger by the day.
Worldwide Demand For Gold Is Exploding!
Gold is many things to many people …
To jewelers, manufacturers and dentists, it's an essential industrial commodity.
To the world's central banks, gold is the world's greatest currency stabilizer.
To the world's savers and investors, gold is a safe haven that shelters their wealth from the corrosive effects of inflation and political crises.
And in volatile times like these, demand for gold absolutely skyrockets. Based on the latest data, for the full year 2006 …
- Gold demand hit an all-time record high of $65 billion .
- Industrial gold demand also hit a record high at 458 metric tonnes.
- Gold jewelry sales in the U.S. hit a record high of $44 billion .
- And investment demand jumped 7% from a year earlier.
Meanwhile …
Gold Supplies Are Dwindling For Many, Many Reasons
There are a lot of reasons for this:
First, many smaller mines have been acquired by major corporations with strong balance sheets. These larger companies have massive cash reserves and have no need to overproduce.
Compare that to the 1980s and 1990s, when many of the world's smaller mines were running full-tilt. They produced every ounce of gold they could, and sold 100% of it. More importantly, they sold 100% of their future production as well.
Second, scores of marginal mining operations have been closed. Literally hundreds of gold mines were boarded up and shut down during gold's 20-year bear market. Now, most of those mines are completely out of commission. Closed mines typically fill up with water and it takes years to re-open them. Sometimes it's not even possible to reopen them!
Third, gold exploration is drying up. Despite the recent bull market in gold, exploration budgets worldwide are no higher than they were in the late 1990s.
That's important because it means far fewer new gold fields are being discovered. And even if exploration spending rises again, it takes most new gold finds five to 10 years to go into production.
Fourth, gold producers have delayed or canceled much-needed mine upgrades. Between 1994 and 1996, gold mines spent more than $140 per ounce of annual production on expansion and productivity enhancements.
But recently, they cut back to just $80 per ounce. Old equipment is not being replaced and new production capacity is not being created. And again — even when capital spending resumes, it will be years before any new productivity improvements will be seen in increased production.
Fifth, major producers are maintaining — or even cutting — production. The majors are focused on enhancing returns and increasing margins rather than expanding production. Put simply, they get a better return on investment by making their new acquisitions efficient than they do by increasing sales of mined gold.
Sixth, mining firms are less interested in selling future production. To protect themselves from price decreases in the 1990s, many mining companies entered into contracts to sell future production (gold that was still in the ground).
Back then, this strategy was a bonanza for gold mines because it allowed them to sell gold they wouldn't even be mining for two, three, even five years into the future.
Now, the reverse is true. Gold prices are rising, making forward selling unprofitable. So over the last two years, mining firms have been buying back their forward sales, effectively reducing future supplies.
Plus, gold that the mines would be selling today was already sold years ago, and few if any significant new supplies can come to market.
Seventh, central bank sales of gold are now frozen. Throughout most of the 1980s and 1990s, huge central banks the world over dumped an estimated 2,341 tonnes of gold onto the market. Every time demand began pushing gold prices a bit higher, the banks would sell like crazy, squashing prices flat.
But all that changed on September 26, 1999. On that day, 15 European central banks, the central banks of the U.S., Japan, and Australia, as well as the International Monetary Fund and the Bank for International Settlements, agreed to strict limits on gold sales dictated by the Central Bank Gold Agreement (CBGA).
Now there are no central bank sales of gold. And in fact, as I just showed you with China, the reverse is true. Central banks are more inclined to add to gold reserves, further diminishing supplies.
All this ultimately relates to one, bottom line all-encompassing force …
Everyone, Including Central Bankers, Realizes That Paper Currency Is Ultimately Worthless
Gold has, and will always, stand the test of time. It will hold its value even when other monetary instruments lose theirs.
So, in my view, gold is going much higher.
If you've been following my recommendations in the Real Wealth Report , hold all positions.
And if you don't have any gold holdings yet, I urge you not to waste any time.
For gold bullion, look at the streetTRACKS Gold Trust (GLD). This ETF owns gold bullion on your behalf and makes it relatively easy to get a stake in the yellow metal.
For a diversified approach to gold shares, consider a metals fund, such as the Tocqueville Gold Fund (TGLDX) or the U.S. Global Investors Gold Shares Fund (USERX).
And if you want to read all specific recommendations and other profit opportunities in natural resources, see my Real Wealth Report .
Best wishes,
By Larry Edelson
P.S. As of last Friday, the open positions in Real Wealth Report 's portfolios were showing open gains of $35,576.54, enough to pay for a subscription 359 times over … Click here to subscribe now!
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