2012-05-14

China's gold bubble

I have maintained that gold is not a bubble, but investor behavior in China resembles a bubble. Now we have anecdotal evidence: China’s Gold Demand Growth Seen Stagnating as Price Drops
The expectation that gold prices will always rise and that gold’s value can only appreciate seems to have faded,” said Xin at Lao Feng Xiang, whose company name translates as Old Auspicious Phoenix. “Some consumers are now sitting on the sidelines with cash in their hands, pondering whether to buy.”

...“I’m not that optimistic about the whole market,” Xin said yesterday in Shanghai, where he’s attending a trade fair. “We’ve seen the signs since the last quarter in 2011, that Chinese consumers share a quite pronounced tendency in which they usually buy gold when prices are rising and refrain from purchasing when prices are conceived to be on a downtrend.”
This is performance chasing, momentum investing.

China enjoyed a stock market bubble that peaked in 2007, which sent investors into a housing bubble that peaked in 2011, which sent investors into a gold (mini-) bubble. Stocks and housing are mostly limited to citizens, but gold is a global market: Chinese behavior helped push gold prices beyond their trend, but not into a bubble.

Without investor demand, jewelry demand will drive gold purchases, and that demand depends on disposable income. There's reason to be optimistic, since the coming government reforms will aim at increasing consumer incomes. Also, the recent cut in the reserve requirement signals an easing cycle is beginning and with a wider trading band for the yuan, in addition to the belief that the yuan is fairly valued, an easing cycle will weaken the yuan. That works in gold's favor since Chinese demand depends on a rising yuan price.

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