Recent Chinese Gold Buying and Its Implications for Future Gold Prices

By Blanchard and Company, Inc ……
 

Gold’s price retreat earlier this month offered long-term investors an opportunity “to buy on the dip.” Yet, you may be wondering, what could be the trigger for the next swing higher in gold prices?

Wells Fargo Investment Institute analysts addressed that very question in an August 9 research note to clients. Here’s what they said: “We suspect gold will soon resume a leadership position.”

What could send gold prices higher again?

Chinese and Indian gold buying, Wells Fargo said. “The two largest country buyers, China and India, have been picking up purchases.”

In fact, gold imports moving from Hong Kong to the Chinese mainland surged from 38 metric tons a month to 154 metric tons a month, over the past three months, according to their report.

“Chinese gold purchases appear to be picking up. In the end, we think gold has much going for it, from negative real interest rates to quantitative easing to a new commodity bull super-cycle. All gold prices need, it seems, is a spark of interest, and we may be seeing it out of China,” Wells Fargo Head of Real Asset Strategy John LaForge wrote.

Another factor that could support long-term Chinese gold buying is the nation’s new “three-child policy”, according to World Gold Council Goldhub research.

In case you missed the news, recently China eased its decade’s long restriction on how many children Chinese couples can have. On May 31, China announced that married couples could now give birth to up to three children.

China’s current population of 1.41 billion – the largest in the world, could begin to rise even faster with the new policy.

What does this have to do with gold, you may ask?

While many Americans buy gold for investment purposes–portfolio diversification, a safe haven, and a hedge against the devaluation in the dollar–the Chinese population buys gold for very different reasons.

In Asia, buying gold is a cultural tradition honed over time. Gold has long-standing cultural importance in Asia that may be difficult for some Americans to even comprehend. For example, Chinese citizens commonly buy gold for the Chinese New Year. It is considered a sign of good fortune for what the New Year will bring. Also during China’s Spring Festival, the Chinese people also buy gold to bring themselves and others good luck. Many Chinese families also hold their wealth in physical gold as well – a longstanding tradition for hundreds of years.

Looking ahead, there is also a link between birth rates in China and long-term gold consumption – which brings us back to the new three-child policy.

“The tradition of gifting gold – in various forms – to newborns, supports gold demand in China with the birth rates rising,” Goldhub research said on August 3.

“We believe that the country’s efforts to boost the birth rate should be good news for Chinese gold retailers. First, it is tradition to gift gold to newborn babies in the form of locks, bracelets, anklets, or zodiac-themed pendants for good luck. And sales of these gold products fluctuate with the number of new births each year in China. Second, as previously stated, a higher birth rate has the potential to lead to stronger economic growth in the long run, supporting retailers’ gold product sales,” Goldhub wrote.

What This Means for You

If you’ve been considering increasing your allocation to gold, the recent price retreat gives you an excellent opportunity to buy even more gold with your dollars than just a month ago. The markets are moving every day and prices this low won’t last for long.

Read the Goldhub research and see a photo of traditional baby gifting gold products here.
 

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