China's Greatest Trade Ever: The Sequel

by: Brian Kelly November 20, 2008 | about stocks: DGP / GLD    

Brian Kelly

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On October 29th, 2008 I wrote "China's Greatest Trade EVER!" in which I suggested that if China were to diversify its foreign exchange reserves into gold they would overwhelm the market. Since they hold so many dollars and gold is priced in dollars, buying gold is a way for China to diversify without selling the dollar.

Lo and behold, The Economic Times reported yesterday (11/19/08) that China is considering increasing gold reserves from 600 tons to 4,000 tons, as a way to diversify their foreign exchange holdings (Economic Times, "China to Increase Gold Reserves to Diversify Risks"). As per usual the People's Bank of China declined to comment on the report. As well, there was a discussion on ChinaDaily.com about what to do if the dollar crashes; curiously, that link has now been deleted, which should keep the conspiracy theorists busy all day.

On Wednesday 11/18/08 the World Gold Council [WGC] released its quarterly report "Gold Demand Trends." According to the WGC, gold demand in tonnage increased 18%, while in US dollar terms demand increased 51%, a record jump. Total supply fell by 10%, primarily due to lower central bank sales.

[click to enlarge]
 

In 2007 total demand in tonnage was 3,518 tons and 2008 year to date demand is 2,599 tons. Total supply in 2007 was 3,497 tons and 2008 year to date supply is 2,492. It is clear to see that if China were to enter the market for an additional 3,400 tons they would need to purchase all the gold supplied in a given year. The gold market is already under supplied, any additional demand could have a major impact on price.




Disclosure: I am long DGP and GLD call options.

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This article has 6 comments:

  •  
    Nov 20 03:45 AM
    This chart looks like it was drawn by a marketing person, not an economist. Supply and Demand, in economics, are not dimensionless quantities; but two dimensional graphs depicting what how much product suppliers are willing to supply at various prices, and how much product buyers are willign to purchase at various prices. The intersection of these two curves is, in theory, the equilibrium price.

    If you go to the World Gold Council web site, you see that the "increased demand", which is more correctly stated as "increased purchases" was due to FALLING PRICES.

    This just tells us that the demand curve has purchasers willing to buy more product at lower prices, which is no big news to anybody who took a semester of economics.

    It doesn't tell us much about the future equilibrium price at all.
    Reply | Link to Comment
  •  
    Nov 20 08:30 AM
    Do you own any gold or just paper?
    Reply | Link to Comment
  •  
    Nov 20 11:17 AM
    China may soon become No. 1 gold producer in the world. They may just hoard their own production and not purchasing from the world market. If they sell part of their production, gold bugs surely will be extremely disappointed.
    Reply | Link to Comment
  •  
    Nov 20 02:04 PM
    The GLD chart sits near 52 week lows. One would expect, with all the global financial turmoil, any anticipated change in the supply/demand picture for gold would show up on the chart. A break over the 75-77 range in the next few days may mean something is up. My motto is "Let the market take you into a trade."
    Reply | Link to Comment
  •  
    Nov 20 06:03 PM
    Why do you think i've been buying chinese gold mine stocks jejeje
    Reply | Link to Comment
  •  
    Nov 26 11:00 AM
    Just paper -- no physical gold


    On Nov 20 08:30 AM deuxsous wrote:

    > Do you own any gold or just paper?
    Reply | Link to Comment
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