The Chinese government has been recommending that their citizens buy gold and silver for a few years now and the people have Chinese been unfazed by record high prices, Buying Gold in August at record levels. Some jewelry shop owners report that 50 and 100 gram bars are like hot cakes.
As the Chinese, with the fasted growing middle class, continue to buy gold it will affect the longer-term trend on gold prices. Not only will this demand continue to push prices higher, it will also put an ever increasing floor (support level) on the gold price.
Many gold buyers are using the dips in price as a buying opportunity. Gold recently breached the $1,900/oz price and then corrected to where it sits today at $1,789/oz. In an interview with CNBC, a gold analyst at Jinrui Futures said, “Many Chinese investors and consumers see price corrections as buying opportunities. The view that gold is an enduring store of value is firmly rooted in Chinese cultural traditions.” He further stated “Gold’s rally over the past two years and the debt worries in the West have only strengthened Chinese investors’ belief that they need to own the metal as an investment asset.”
Gold analysts and many economists are predicting much higher gold prices by the end of the year. In fact JP Morgan Chase recently announced that they see gold at $2,500/oz by the end of 2011. As a result of rapidly rising prices, newer riskier ways of investing in gold have emerged in China as they have around the rest of the world. The derivatives paper market is allowing Chinese people to buy paper gold on margin, which allows them to only put up a small percentage of their own money to buy large amounts of gold. This is a much riskier way to own gold than owning the physical metal because if the price falls dramatically while you are on margin losses can multiply very quickly. Even still these vehicles are becoming increasingly popular.
Margin requirements on these accounts have been raised multiple times in the past few months as a way to “protect the people.” Another view point on these increased margin requirements is to push the price of gold down as people who can’t afford the increase are forced to sell.
Chinese demand is clearly increasing, and as a result physical supply will become tighter and prices will most likely continue to rise well into the future. Now might be a good time to start buying gold.