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Aug 24, 2009

Stockhouse Gold and Silver Supplement

Stockhouse Gold and Silver Supplement

Why China is about to buy a lot more silver

Posted: 24 Aug 2009 10:56 AM PDT

Citizens urged to put 3% to 5% of their net worth in precious metals

Two years ago, on August 21, China’s government allowed its citizens to invest in an entirely new asset. It allowed them to invest in Hong Kong-listed stocks.

Hong Kong is a special region of China. It’s one of the most dynamic, capitalistic places on Earth. The move from the government was a move toward “investment freedom” for the Chinese people.

On that day, Hong Kong’s benchmark stock index rose 8.74%. Over the next two and a half months, it skyrocketed from 11,000 to over 20,000. It was a chapter in a story that you should get used to over the coming years: When the Chinese decide to invest in something, it causes giant ripples across the world.

This sort of situation is starting to happen again: This time it’s happening in precious metals, especially silver.

The Chinese have a centuries-old affinity with silver. It began in the 1500s with the explosion of trade with Mexico via the Spanish galleons. These sailing ships were the super-tankers of their age. They made one voyage per year, carrying tea, silks, and spices from Asia to Mexico. The ships returned to Asia with gold and silver. After the Chinese threw off imperial rule in 1912, the country used silver money. Today, the Chinese word for “bank” means, “silver movement.”

And now that China is becoming one of the richest, most dynamic capitalistic countries on Earth, this story is about to take a modern twist. The Chinese want silver again.

Thanks to a decade of wealth accumulated by regular Chinese citizens, there is plenty of cash to chase good investments. As the famed global investor Jim Rogers points out, these people are the best capitalists in the world. They are great savers. Chinese people want their money to work for them… so they invest.

I recently watched a China Central Television piece on gold investing. According to the program, there are some 400 million households in China, with an average ownership of about 0.1 ounces of gold. The average gold ownership in most emerging countries works out to about one ounce per household. The Chinese are beginning to make up that gap. From 2006 to 2007, domestic demand for gold rose 60% to around 700,000 ounces. Experts continue to urge citizens to put 3% to 5% of their net worth in precious metals.

Chinese government statistics show the average urban Chinese household has about $1,300 in disposable income to invest. While that doesn’t seem like much, when you add up all those households, there’s about $36 billion that could move into the next big investment opportunity – precious metals.

The government is now actively encouraging its citizens to buy gold and silver. They recently unveiled silver bullion for investing (you can see the video here). The premise is that gold was 50 times more expensive than silver in 2007, but is now 70 times more expensive.

The government is promoting silver bullion as an investment for regular citizens. And remember, a bunch of Chinese students laughed at U.S. Treasury Secretary Tim Geithner this year when he claimed the dollar was safe. The Chinese know the value of real assets – real money like gold and silver.

What does this mean for silver prices? It’s impossible to say. But here’s a little math that interests me. According to the Silver Institute, demand for silver in 2008 (for industry, jewelry, and investing) was 832 million ounces. At today’s price, that’s an $11.5 billion market, or about 1/3 the capital available in China alone.

The most important thing to understand about this situation is the Chinese people become freer every time the government loosens up a restriction. These people couldn’t legally buy silver bars before. Now, they can. They’re becoming richer, and they will continue to do so for decades.

Add this to a world already waking up to the grand currency debasement you’ve read about in DailyWealth (like here and here), and you have a recipe for the continuation of the big bull market in silver and other precious metals.

Video: Intelligent Investing With Steve Forbes

This week's interview
Bruce Berkowitz, founder of Fairholme Capital Management and Fairholme Fund, shares the secrets behind consistently beating the S&P.

Bundesbank confirms Germany's gold is in play

11:10a ET Monday, August 24, 2009

Dear Friend of GATA and Gold:

Germany's central bank, the Bundesbank, today confirmed that much of its gold is held outside the country at "trading centers" where the bank conducts "its gold activities."

The Bundesbank's statement, unsigned and issued by the bank's press office, came as an e-mailed reply to GATA consultant Rob Kirby of Kirby Analytics in Toronto (, who sought the Bundesbank's comment on international journalist Max Keiser's recent assertion that the Bundesbank had told him that most of Germany's gold is in the custody of the United States in New York:

While contending that Keiser's assertion was "not correct," the Bundesbank's reply to Kirby acknowledged that at least some German gold reserves indeed are held outside the country, maintained that this is common practice among central banks, and implied that the Bundesbank is trading gold despite its long-held position that it is not selling the gold it has been entitled to sell under the European Central bank gold agreement.

The Bundesbank's reply to Kirby did not specify its "market-related reasons" for keeping gold at "major gold trading centers," nor the bank's "gold activities" there. But central banks often "lease" gold, lending it to bullion banks for sale into the market in exchange for a tiny interest payment, a currency-intervention mechanism used by central banks to suppress the gold price and support government currencies and bonds.

If Germany or the world had a financial press interested in reporting on the gold market seriously, the obvious follow-up question to the Bundesbank would be to ask it to specify its "gold activities" at those "major gold trading centers" and the purposes of those activities. Unfortunately few if any gold market reporters and commentators ever put questions directly to the largest holders of gold, central banks.

Perhaps some of the documents involving the U.S. gold reserve that the Federal Reserve Board is refusing to release to GATA involve the German gold reserve, the Bundesbank, and gold leasing.

The Bundesbank's reply to Kirby is appended.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *



Sent: August 24, 2009 4:29 AM


Subject: Antwort auf Ihre Anfrage 2009/008962 - PRESSE-BBK-WEB-Formular

Dear Mr Kirby:

Thank you for request.

Please note that the quote of Max Keiser in the video on "Youtube" is not correct and please note that it has not been authorized by the Deutsche Bundesbank.

The Deutsche Bundesbank keeps a large part of its gold holdings in its own vaults in Germany, while some of its gold is also stored with the central banks located at major gold trading centres. This has historical and market-related reasons, the gold having been transferred to the Bundesbank at these trading centres. Moreover, the Bundesbank needs to hold gold at the various trading centres in order to conduct its gold activities. It is common practice for central banks to keep part of their gold reserves abroad.

Besides the Deutsche Bundesbank, other central banks and official agencies place gold in the custody of foreign central banks. According to its own data, the Federal Reserve of New York holds gold stocks for almost 60 different central banks and official agencies.

The Deutsche Bundesbank can withdraw gold from its holdings with foreign central banks at any time. The Bundesbank’s gold is stored in the form of individually identifiable bars. Gold stocks are subjected to regular audits. Relevant inventory controls are conducted on site.

The Bundesbank applies the principles of safety, cost efficiency, and liquidity to the management of foreign reserves in general, and to that of gold reserves (and, in this context, to the question of custody location in particular). As a rule, the physical transfer of gold reserves to another storage location cannot be ruled out. On the other hand, transportation to Germany and safekeeping in the Bundesbank’s own vaults would entail
high costs.

For further information please refer the "Joint Statement on Gold":


Yours sincerely,

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main

Tel. +49 69 9566 - 3511 or 3512
Fax: +49 69 9566 - 3077