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China Unleashes a Raging Bull on the Gold Market

March 11, 2011

    by Eric Hammer | FTMDaily Contributing Writer

    TEL AVIV, Mar 11 – In yet another sign of the growing importance of the Chinese economy on the world stage, Chinese consumers have been snapping up gold in record numbers recently with consume demand reaching more than 200 tons this past year and combined government and consumer demand reaching a whopping 579.5 tons.

    The Chinese government has also ramped up production of the yellow metal and now leads the world in production of gold from mines, extracting some 13% of the world’s gold supply from the ground each year.

    The reason for the gold fever should come as no surprise to anyone who has been following the gold market here in the West however. Like everyone else, the Chinese fear the weakening of national currencies, especially of the dollar, in which they are heavily invested and as such have been seeking safer havens for their money in the face of uncertainty surrounding paper money.

    What is striking however regarding the consumer precious metals market in China is that it is a fairly new phenomenon. It is only in the past few years that China has started to develop a middle class which is capable to saving money and which indeed saves as much as 40% of its income. Chinese government officials opened the gold markets to the public only in 2002, allowing the trade of the metal to occur largely without government interference for the first time in modern Chinese history.

    Some analysts believe that the gold fever in China will continue to gain steam as the Chinese fear not just the potential collapse of the dollar but also of most currencies with the OECD, the Organization for Economic Cooperation and Development.

    The OECD, sometimes nicknamed the “developed nations club,” is an organization that promotes understanding and sharing of information amongst developed nations all over the world. It is based in France and has some 34 members with the most recent additions being Israel and Estonia.

    Given that interest rates in most OECD nations are at historic lows, including those of the Euro Zone and the United States, the Chinese may fear inflationary pressures which could erode the value of paper money from these countries over time, thus making gold an even more attractive option for storing value.

    In all cases however the Chinese government has remained largely close lipped about their intentions regarding gold purchases, preferring to conduct their business as quietly as possible so as not to contribute to rising prices which could make the cost of purchasing the precious metal even more expensive for them.

    This has led to speculation amongst some analysts as to China’s true intentions regarding their massive dollar holdings and what it could mean for the American economy. One thing is certain however: gold is likely to continue to rise in value as the Chinese snap up more and more of it for reasons that only they are certain of.

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