Gold chart showing upward movement against a background of gold bars

If you follow gold, it bears to keep an eye on China


Written by Philip Diehl

Mar 1, 2016

I occasionally go back through my blog posts to see how my predictions bore up after a year or so. This can be humbling, but sometimes you get it right. I'll leave it to others to dig up the ones where I missed the mark.

In August 2013, The Wall Street Journal Online and Asia Editions published an opinion piece I wrote about the effect a hard landing of the Chinese economy would have on gold prices. I got the basic point right. The Chinese economy was, in fact, in the midst of a long decent that is now looking like the hard landing pessimists expected.

It's difficult to reckon with any certainty the current state of the Chinese economy because few analysts have much confidence in the government's numbers. I suspect few Chinese policy makers have much confidence in them either, considering the incentives to hide failures and manufacture successes throughout the Chinese economy and government bureaucracies. Most likely, things are worse than they let on.

But what we know now is bad enough. The serial devaluations of the Renminbi last year and China's falling demand for commodities and other imports contributed mightily to the fear that swept through world markets over the first five weeks of 2016.

As I expected, gold demand in China rose in the face of the economic uncertainty faced by the Chinese. For example, as the economy deteriorated in the fourth quarter of 2016, Chinese demand for gold investment bars and coins leapt 25% over 4Q 2014.

But I missed the extent to which turmoil in the Chinese economy would roil global markets, increasing gold demand around the world, not just in China, and since January 1, driving gold prices upward by $150 an ounce.

China is the world's largest market for gold and its second largest economy. The Chinese middle class is the fastest growing in the world, with a strong cultural attachment to gold. China's central bank holds the world's largest foreign reserves, larger than Japan, Europe, Saudi Arabia, and Switzerland, combined, and 30 times larger than US reserves. This matters because China's central bank has a big appetite for gold.

If you follow gold, it bears to keep an eye on China.

The WSJ article is behind a paywall, but a slightly longer version of it can be found here.

Philip N. Diehl is the President of U. S. Money Reserve, Inc., a former chief of staff of the U.S. Treasury, and 35th Director of the U.S. Mint. The views expressed in his blog are those of the author, and not necessarily of the company.


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