The Chinese authorities aren’t known for making about face changes of direction without a good reason so it’s intriguing as to why they have changed the rules concerning the sale of physical gold in the form of bars or coins to private individuals. Not only have they allowed the sales after decades of dissuading the public from buying precious metals as an investment but they are actively encouraging the process with TV advertisements according to an article by Thunder Road reprinted by Mineweb.
Silver in particular is getting the big push. The advertisement advises the public that gold was fifty times more expensive than silver in 2007, but now that figure has reached over seventy times. The advert suggests that silver has been undervalued in recent years; it says the metal is the right investment for individual investors and could be a good way to cash in.” To support the advertising campaign, China has introduced its first ever investment opportunity for silver bullion. The bars are available in 500g, 1kg, 2kg and 5kg with a purity of 99.9%. The vast majority of Chinese are not rich by western standards so it will be the middle class Chinese and wealthier (they car-buying community as we refer to them) who could contemplate buying and holding physical metal. Silver on the Changjiang market this morning was RMB 3470/kg according to MetalMiner IndX equivalent to US$ 508/kg or US$ 254 for the smallest 500g bar (plus dealing costs no doubt). This may be why the government is pushing silver rather than gold. A gold bar of the same weight would cost RMB 108,650 or US$ 15,905 at today’s spot price. Of course there is nothing to stop the authorities issuing smaller denomination gold products like the Eagle and Maple Leaf coins that are so popular in North America. Even so gold holding by private individuals in China is rising fast and gold bars can be bought at the counter of retail banks in most major cities in China now.
Our manager in China has been watching this development with some alarm. He feels there is already too much speculative activity in shares and property, and this latest move to encourage investment in metals is an attempt to soak up excess liquidity from the market and hence reign in inflationary forces. However he also makes the point though that the vast majority of Chinese, with little or no state safety net, have to keep their limited savings readily available for any unexpected expenses, such as illness. So it will be interesting to see how the often keen gambling Chinese take up these new forms of investment as a way of saving for their children’s education or for their retirement. Simply by virtue of the number of potential buyers in China, the government’s urging to buy silver as an investment with potential to make gains could become a self fulfilling prophesy. Watch the domestic production and import figures for China over the coming months and track domestic gold and silver prices on the free MetalMiner IndX. It looks like precious metals may finally be about to realize the relentless hype we have been hearing all year from some in the investment community.