Reg, I'm a long term holder in PRU and haven't been overly bothered by the recent gold price correction but that said, I must admit I find articles like the one below illogically soothing.
China's gold tsunami Karen Maley Published 8:25 AM, 8 Feb 2011 Last update 10:30 AM, 8 Feb 2011
Global inflation concerns are adding to gold?s luster, with a recent report predicting that Chinese demand for gold as an inflation hedge is resulting in unprecedented physical demand for the precious metal, which will likely push prices higher this year.
At the same time, there are signs that gold is expanding its role as an alternative currency. Overnight, the US investment bank JP Morgan Chase & Co said it would accept physical gold as collateral against securities lending and repurchase obligations. The bank explained that many of its clients held gold on their balance sheets as an inflation hedge, and wanted to use this gold as collateral for financial transactions.
The latest newsletter from Sprott Asset Management, entitled ?Gold Tsunami?, focuses on gold?s attractiveness as an inflation hedge for Chinese and Indian investors. It argues that while western investors are content to hold paper assets, such as stocks, bonds, annuities and insurance, along with their real estate investments, the attitude of Chinese and Indian investors is very different.
"Halfway across the world, investors in China and India have never trusted paper investments as a store of value ? and they?re converting their hard earned paper money into gold and silver bullion. Not that this is anything new. It isn?t. But the scale and speed with which they are accumulating precious metals IS new, and it?s driving the fundamentals that we believe will lead to higher prices in 2011."
It?s not hard to understand the growing Chinese enthusiasm for gold. Officially, China?s inflation rate was 4.6 per cent in December, but many believe the actual inflation rate is considerably higher. But Chinese savers earn a paltry interest rate of 2.75 per cent on one-year deposits, which means that they face negative real interest rates.
Faced with these dismal returns, Chinese households and businesses have been pouring money into physical assets, such as food, real estate, and commodities as a hedge against inflation. Chinese authorities are now trying to quell property market speculation by making it more difficult for buyers to get bank finance for their second and third investment properties, and have begun experimenting with property taxes in some cities.
This has caused Chinese investors to turn to gold. According to the Sprott newsletter, China, which is already the world?s largest gold producer, imported more than 209 metric tons of gold in the first ten months of 2010 alone. This compares with the estimated 45 metric tons it imported in all of 2009.
What?s more, it is clear that gold is being bought as an investment, rather than for jewellery. According to World Gold Council figures, Chinese retail demand for gold jumped 70 per cent between October 2009 and September 2010, but in the same period the demand for gold jewellery rose by a much more modest 8 per cent.
According to the Sprott letter, ?There is a clear trend developing for Chinese investment in gold as a monetary asset, and China is buying so much gold for investment purposes that it now threatens to supersede India as the world?s largest gold consumer.?
The newsletter notes that total Chinese demand for gold in 2010 is expected to reach approximately 600 tonnes, just behind India?s 800 tonnes. This would mean that together the two countries would account for more than half of estimated world mine production of 2,652 tonnes in 2010.
The Chinese are also showing a voracious appetite for silver, with silver imports increasing fourfold in 2010 from the previous year. In 2005, the Chinese were exporters of silver, selling more than 100 million ounces on world markets. But by 2010, they were big buyers, importing more than 120 million ounces. This represents a huge swing in a market that in 2009 supplied a total of 889 million ounces.
At the same time, it?s also becoming easier for the Chinese to invest in gold.
The Sprott newsletter points out that Chinese citizens have only been able to purchase gold freely since the early 2000s, when the long-term monopoly of the Chinese central bank was abolished.
But last year, an initiative between the Industrial Commercial Bank of China ? which is the world?s largest consumer bank, with about 212 million separate accounts ? and the World Gold Council, set up a gold accumulation investment plan which made it even easier for investors in mainland China to accumulate gold. The new investment plan requires a minimum investment of either 200 renminbi ($US30.50) a month, or one gram of gold per day (worth about $US42).
The investing Chinese public has responded extremely enthusiastically. Since the plan was launched last April, one million accounts have been set up, which has already resulted in the purchase of 10 tonnes of gold.
Now, so far, the ICBC has only made the gold investment product available in some Chinese cities. Sprott Asset Management estimates that if the plan were expanded throughout ICBC?s network, and China?s next four largest banks launched similar plans, then this could result in an extra 300 tonnes of gold being bought each year, or more than 10 per cent of estimated 2010 global gold production.
It?s notoriously difficult to estimate future gold demand. However, there is a strong case that Chinese demand for gold as an inflation hedge will remain strong for as long as the Chinese authorities keep real interest rates artificially low.
And with the Chinese government worried that higher interest rates will put upward pressure on their exchange rate, and undermine the profitability of Chinese firms, it?s unlikely to take bold tightening steps any time soon.
According to Sprott Asset Management, ?We believe Asian demand for physical gold and silver is akin to a tsunami. While precious metals prices have corrected on the paper exchanges, the inflation resurgence in Asia is quietly driving new, unforeseen levels of physical demand for the metals.
?While the world continues to float on a sea of paper, this massive wave of physical demand silently threatens to crash into the physical gold and silver market, potentially wiping out tangible supply.?
PRU Price at posting:
$2.98 Sentiment: Buy Disclosure: Held
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