While the stock market was plunging yesterday in the U.S., I was visiting the Shanghai Gold Exchange here in China. This is ground zero for one of the biggest waves of gold buying in history.
Three years ago, when the exchange was first opened and gold trading in China was freed for the first time in 54 years, I told readers that it would unleash a new surge in gold demand.
And that’s exactly what’s happened:
There are an estimated 300 million investors in China, more than the entire population of the United States, and a growing number has been buying gold with both fists.
They’ve poured money into gold jewelry, where sales were up 29.5% in April alone.
They’ve poured money into the Shanghai Gold Exchange, where gold bullion trading volume has surged beyond that of Hong Kong, London and even New York.
And they’ve emerged as a powerful new force helping to drive up the world price of gold in recent years.
But That Was Just the First Wave of Buying.
Now Get Ready for an Even Larger Wave …
Investors around the world are souring on the U.S. stock market – that’s one reason why the Dow Jones plunged 214 points yesterday.
Meanwhile, they’re looking for other alternatives. That’s especially true here in China. And it looks like they’re going to have a brand new vehicle for doing that.
The big news:
A few short months from now, China is likely to introduce a gold exchange-traded fund for domestic residents.
For the first time in history, hundreds of millions of ordinary Chinese citizens will be able to invest in gold without buying gold jewelry, gold coins or gold bars.
They won’t have to worry about storage, transportation or security. They will be able to buy the gold ETF in thousands of banks and brokerage offices all over the country. They will be able to buy online. And they are almost certain to generate a new, powerful source of demand never before seen in the world gold market.
We’ve already seen the dynamic impact of gold ETFs in Europe and the United States. These are the fastest growing ETFs in history, with U.S. ETFs attracting $8 billion in about 18 months. These funds played a major role in doubling the price of gold. And now, I have no doubt that …
The New Gold ETF in China Could
Send Gold to $1,000 — and Higher —
A Lot Faster Than Expected!
Gold is already being driven by a perfect storm of forces — spreading fears of a showdown with Iran … billions in petrodollars seeking a safe haven … the falling U.S. dollar.
So even without the new gold ETF in China, gold was moving toward the $1,000 level and beyond.
Now, with a new gold ETF being launched in China, gold could reach the $1,000 mark a lot faster and a lot sooner than anyone expected.
Why? One reason is this:
The four largest banks in China who are sponsoring the Chinese gold ETF — the Bank of China, the Industrial and Commercial Bank of China, the China Construction Bank and the Agricultural Bank of China — can’t wait around to start buying the needed gold bullion. They will have to start buying physical gold now in order to back the ETFs that will soon be issued.
Shanghai Business Owners Moving to
Gold Relentlessly and Aggressively
This week, to help gauge the sentiment regarding gold, I also talked to several local business owners. 
Mr. Huang, for example, owns a plastic injection molding company. Even without asking him about gold specifically, here’s what he told me:
“The yuan strengthened today, breaking 8 to the dollar for the first time since 1994. I’m going to buy some more gold with the stronger currency. The U.S. dollar is very weak.
“The gold market here is getting crazy. I tried to buy a kilo [32.15 troy ounces, or about $23,000] last week. I went to five gold shops. Four of the five were too busy to serve me. The fifth one sold me a kilo, but I had to spend four hours in the shop before they could secure the purchase and arrange delivery to my bank.â€
Mr. Lee, meanwhile, is the owner of a local clothing retailer on Shanghai’s equivalent of Fifth Avenue. His comment:
“Business is good — my sales were up 18% in April. But the costs of everything I buy for the business are also rising. Even labor. The city hiked taxi fares 6.9% last week. So my employees wanted the same. They’re good people and I don’t want to lose them. So I gave them a 7% raise.
“Production costs are also crazy, up 13% on average, and that includes local goods, like shoes, which I buy from a factory about ten kilometers out of town.â€
Separately, a currency trader at the Bank of China explained the situation to me this way:
“China is getting richer by the day. In turn, it’s consuming vast amounts of commodities and natural resources. That’s leading to inflation, which is now running at over 7%.
“So now wages must go up. It’s a classic inflation cycle, but I see no end in sight. Everyone’s still worried about China exporting low-cost goods and forcing prices down. But they’ve got it backwards. Now, what they should be worrying about is China exporting wage inflation and forcing prices higher!â€
All three voiced unswerving enthusiasm for gold the likes of which I haven’t seen since the late 1970s and early 1980s when gold ratcheted up to $875 per ounce.
Except this time it’s also coming from businesses — not just frightened individuals. And this time, it looks like the enthusiasm can be sustained — for many months, even years.
Look at it from this perspective: Last year, my room at this 5-star hotel cost me $200 a night. This year, I was shocked when I checked in: The same room cost $300 a night.â€
What’s driving up the cost of living in Shanghai? The same thing that is driving up the cost of living all over China:
- Per-capita income grew at an astounding 10.8% in the first quarter of this year.
- April retail sales rose 13.4%, the fastest pace in a year. That includes a 17.6% jump in household spending … a 17.4% surge in sales of clothing, shoes and accessories, and … the whopping 29.5% increase in jewelry sales!
- Money supply growth, or M2, a measure that includes cash and all deposits, jumped 18.9% in the past year, beating the central bank’s target for the 11th month in a row.
- Now, all it takes is a fraction of this new wealth to rush into gold or the Chinese gold ETF, and you could see one of the greatest, rip-snorting buying frenzies of all time.
Where I Think Gold
Is Headed Next
The new wave of gold buying from China just adds more momentum to the perfect storm of forces driving gold higher. In this context, here’s what we’ve got:
1. We have a confirmed bull market in gold. That fact is now undisputed.
2. This week we saw another normal-but-brief, scary-but-healthy pullback in gold.
Never forget: Gold has soared from $540 to $732 in a little over two months. So it was perfectly normal for gold to experience some profit taking. But that’s all it was: profit taking.
3. The dollar is in big trouble. It has lost ground quickly in the last month, and it’s on its way to losing a lot more in the near future. That’s naturally going to force the price of gold, denominated in cheaper dollars, to adjust upward very promptly.
4. Hot spots like Iran and Venezuela are not going away. Iran and the U.S. are headed for a confrontation, especially now that U.N. inspectors have found weapons-grade enriched uranium in Iran. Meanwhile, Venezuela’s President Chavez is starting to sound just like Iran’s President Ahmadinejad — accusing the U.S. of genocide and telling Bush that he should be in prison.
5. This recent correction won’t last long. When it’s over, I think you’ll see gold at $740 an ounce. Next, it will run to its all-time U.S. dollar high of $875 … and then toward $1,000. After that, the sky’s the limit.
Beware: Wall Street’s Habitual Gold and Oil
Naysayers Will Again Try to Scare You Away!
On CNBC, one analyst after another is suddenly trying to convince you that this temporary pullback is a “sea change†in the market.
They’re dredging up one rationale after another to justify why they think “oil, gold and natural resources have topped.â€
Don’t fall for it. I think they’re failing to analyze the gold market from an international perspective. All too often, they simply look at prices in terms of dollars. I feel that dollar-only perspective is both dumb and myopic. Consider this:
- In Thailand, gold just hit 100-year highs in terms of the Thai baht.
- In India, gold just hit all-time record highs in terms of rupees.
- In Vietnam, too, gold just hit all-time record highs in terms of Vietnamese dongs.
And yet, from everything I see and hear, demand remains strong in all three regions, as well as the rest of East Asia. So the record-high prices have not discouraged demand in Asia.
Expect to see the same pattern in the United States: Even an all-time high price for gold will still be too cheap and may not be enough to suppress the growing worldwide hunger for gold.
Your Next Moves
First, make sure your stock portfolio is focused primarily on companies that will take advantage of the natural resource boom. That excludes U.S. tech stocks, which have just plunged to their lowest level of 2006. You should also avoid stocks that are vulnerable to rising interest rates.
Second, make sure you have a good stake in streetTRACKS Gold Trust (GLD).
Third, consider solid precious metals mutual funds such as USGI World Precious Minerals Fund (UNWPX) or DWS Gold & Precious Fund (SCGDX).
Fourth, if you’re getting my Real Wealth Report, hold all positions! That includes all core gold positions, which, even after the recent correction, are still showing a combined gain of more than 60%. Ditto for all energy positions.
Fifth, for funds you can afford to risk, I’m lining up new recommendations aiming to turn a modest $4,800 investment into as much as $21,500 very quickly. (See my latest special report for details.)
Sixth, do not take profits here. Hold! Never forget how huge the profits can be in gold and gold shares. Some historic examples:
- In the 1930s, Homestake, a gold producer, went from a bottom of $65 a share to $130 in 1931.
- It then nearly tripled to more than $350 by 1933.
- By 1936, Homestake had climbed to $540 a share, a tremendous increase. That would be like Newmont Mining going from its low of $12.19 a share in 2000 to more than $88. Keep in mind, the stock is at $55 now.
- Homestake was not an isolated example. Dome, another great gold producer, did even better. You could have bought Dome for as little as $6 a share in 1932. But in the next seven years, it paid $16.60 in dividends and the stock rose to $61 a share.
- On your $6, you would have earned back nearly $77, or 12.8 times the initial investment. That’d be like Newmont going to more than $154 a share, almost triple what it is today!
The moral of the story: The fun is just beginning, with the best part likely still to come. So stay on your toes. Sharp corrections in a bull market are often a prelude to even bigger upward moves.
Best wishes,
Larry
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About MONEY AND MARKETS
MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Colleen Collins, Amber Dakar, Ekaterina Evseeva, Monica Lewman-Garcia, Wendy Montes de Oca, Jennifer Moran, Red Morgan, and Julie Trudeau.
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