We have heard of the growing Indian wealth and, therefore, the increasing amount of gold used traditionally. That can only go so far, though, as the Indian population is still fairly limited financially (probably 10 years behind China).
We have all said it and heard it: China is going to do something and therefore it will change the face of the object in question. It recently happened to Rare Earths, as it has happened for many commodities, including copper. Recently the Chinese government started to run ads and to encourage the populous to start buying gold and silver as a safe investment. Could you imagine what would happen if ¼ of China’s people bought 1 ounce of gold each? That would be equivalent to a 250 million ounce demand surge in fairly short order. 250 million ounces of gold is equal to roughly 3500 tons. Just for comparison, last year, total gold demand was 3,804 tons. So basically it would be a 90% increase in NEW demand. WOW!
Far fetched? I don’t really think so since the Chinese people are more likely to act on a government decree that almost any other people. Further ¼ of the population of china is closer to 330 million people (which would represent 4500 tons of gold). Not all people can afford to buy 1 ounce, but there are many people who can afford and will buy 5,10 or even 20 ounces. So on average one ounce per person isn’t such a far-fetched thought. This would be like saying that every man, woman, child and illegal alien in the United States will buy one ounce of gold each. That is a huge number.
Naturally, this won’t have an effect on the price overnight, but over the next year or two, we should see the price of gold appreciate substantially. I am still holding my price target steady for the year end of 1200-1300 dollars. I don’t think that this will transpire overnight, but the possibility of 2000-3000 dollar gold has now developed a tangible manifestation…China.
This move shouldn’t come as a surprise to anybody that hasn’t been living under a rock. Multiple times, China has called for the end of the use of the US currency as the world reserve. They have been concerned for several years about the increased rate of US dollar printing and debasing. The logical move for the Chinese is to stop buying US dollars and to start buying something of value, in this case gold.
There will be a huge windfall effect as a result. Naturally, the price of gold, and thus the ownership of physical gold will be very attractive, but equities in gold will shine brighter than ever. This kind of surge in demand will make gold miners trade at multiples of where they are now. Junior gold companies will also make 10 baggers look meager. Investors will pay heavily for gold discovery as they are a) becoming less frequent and b) have greater competition from the majors to be bought.
Victor Goncalves writes The Equities & Economics Report.