China’s Economic Crisis Drives Frantic Gold Buying

The Chinese economic slump and the accompanying rush to gold

Bullion.Directory precious metals analysis 09 October, 2023
By Peter Reagan
Financial Market Strategist at Birch Gold Group

Over the past two decades, China has become an international political and economic rival to the U.S. It’s easy to see why. Since the turn of the century, China’s robust manufacturing and export-based economy grew at truly mind-boggling rates – averaging 8.4% per year. At that rate, China’s GDP doubles every 8 ½ years!

China has leveraged its strong economic growth to carve out a major role on the world stage. The “soft power” drive led to massive investment in international infrastructure projects, railways, roads, pipelines, ports and telecommunications networks – creating economic dependencies across Asia, Africa and Europe.

Compared to the U.S. economy, increasingly based on financial services and debt creation. U.S. GDP grew, on average, about 2% per year since 2000. There’s a little bit more to this story, though. We know that developing economies like China’s have much more room for growth than developed economies like the U.S. (and, by extension, the rest of the G-7).

The problem with rapid growth, as we’ve seen countless times in history, is simply that it’s not necessarily sustainable growth.

China’s official economic reports are much, much more influenced by politics than facts. So what does the world’s second-largest economy really look like?

So far this year, the yuan has lost 6% against the U.S. dollar. Hardly enough for a $100 premium on gold’s spot price. But if we concur that there is a crisis element to the premium, then its lofty valuation alone tells us things must not be going so well on the Chinese front.

China’s entire real estate sector, which accounts for nearly 30% of the nation’s GDP, is in free-fall. Again. Rumblings started two years back – and the situation stabilized, or seemed to stabilize. At least there weren’t mobs of angry citizens roaming the streets demanding their money back from bankrupt realtors.

And China still hasn’t recovered from its pandemic lockdowns. As the West struggles to recover from its own lockdowns, which lasted for a year to some extent, we forget that China continued its lockdown policies well past what most considered reasonable.

If lockdowns in the U.S. alone required trillions of dollars of stimulus to slap the economy awake, what can we expect from China, that has just barely opened up shop again?

We know how governments respond to economic challenges: Torrents of newly-printed cash. Banknotes flooding the streets – and the inevitable inflation spike that accompanies such attempts to reinvigorate the economy.

Chinese citizens are anticipating such developments. They know their currency will be depreciated by money-printing in the near future, so what do they do? Gold bullion and coin sales have surged 30% over last year’s numbers. We’ve seen a 40% spike in withdrawals of physical gold bullion from the Shanghai Gold Exchange. Consider also the 15% increase in gold imports back in August.

When we remember that the Chinese government is now officially stockpiling gold as well, it seems like it’s not just the citizens who want insurance against an economic downturn, but the government as well.

How hard will gold launch when the hiking cycle reverses course?

Argor Heraeus’ latest report on precious metals hits us with what look like good news from the opening sentence:

The gold price tends to rise following the first cut of U.S. interest rate cycles. On average since 1984, one calendar year after the Federal Reserve first cuts its rate after a hiking cycle, gold is 10% higher than the day of the decision to reduce interest rates, and after two years is 18% higher.

There’s a lot to unpack there, but perhaps the first thing to address is that these are only good news to an extent. As we’ve been ready to ask, is it proper to celebrate gold soaring on the back of an economic collapse? For this is no ordinary tightening cycle, being the “worst” of its kind since the 1970s.

And the money printing beforehand was the largest issuance in history, too.

Heraeus makes it seem as if it’s a big deal if we end up having to brace for lower gold prices until the end of the year. After all, yields are at their highest point in 16 years. But how low are these gold prices, really? We still seem to have little to no official explanation as to why gold jumped from $1,650 to $1,900 and above going from spring to summer.

That price action signals to us that the metal is bottling up. When the first rate cut materializes, even though Heraeus notes historical precedent doesn’t make it a guarantee, we feel it is that gold will skyrocket. The price chart of this year, as it bounced down from nearly $2,000 during high interest rates and a still-going hiking cycle, tells us as much.

Heraeus says we’re some ways past the point of the end of the average hiking cycle. Ahead of the hiking cycle, we would often bring up how gold has gained in nearly each bout of monetary tightening in history. It’s become a talking point since then.

So we might all do well to remember that, however well gold does in hiking cycles, it performs far better once the Federal Reserve starts cutting. And since that point is beginning to look like a tapping-the-foot affair, gold investors have every reason to be excited.

Here’s why it’s good to remember that only physical gold is real gold

In the above outline, Frank Holmes wonders why Costco is selling out gold bars while institutions are cutting their gold exposure and have been doing so since April last year. Now, we no longer have to attempt to demystify institutional sentiment, as the answer is very much apparent.

Across the board, we’re seeing an ever-increasing emphasis being placed on physical precious metals. You might recall the little thing called the Basel III agreement, which enshrined the importance of physical gold as an asset.

It’s probably not a coincidence that central bank bullion demand shattered historic records at the same time.

The Bank of England, which famously parted with its gold reserves around the turn of the century only to quickly regret it, gives us a rundown called As Good As Gold. In it, we’re treated to some of gold’s history along with its interesting properties. For example, did you know…

• That the area now known as Turkey issued crude gold coins in the 700s that are worth more than any modern gold coin?
• That gold doesn’t rust or tarnish, a rarity among metals that allows it to retain intended utility for thousands of years?
• That it’s the best conductor of electricity by far (and that we only use copper because it’s much cheaper)?

But there is a catch to all these points. All of these properties apply to physical gold only. Commodities contracts simply aren’t the real thing.

We’ve reached a point where we’re almost curious why, in India, everyone from the farmer to the Maharaja hoards gold. You’ll see no shortage of articles, videos and insights highlighting it as a sort of oddity.

Could it simply be that we, as investors in the West, have lost our way? That maybe, slowly, we’re rediscovering it once again?

This article was originally published here

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