Changing of the Guard for World’s Largest Gold Buyer

gold investmentsFor as long as anyone can remember, India has been the largest gold bullion buyer. But, for 2012, China may overtake it.

In 2011, gold bullion demand in China surged 20% to 769.8 tons, while in India, demand dropped slightly, to just over 933 tons (Source: Asia Today, February 17, 2012). Another 20% or so run up in demand for gold bullion in China this year and it could easily overtake India as the largest buyer of gold bullion.

Over the last few years, the government of China has created television ads encouraging its citizens to buying gold bullion. In 2011, China introduced its first ATM gold-bar vending machine. The country is rolling out 2,000 of them. The machines update the price of gold bullion every 10 minutes, and people can exchange their currency for an equal value amount of gold bullion.

There is no question that China’s central bank has put its money where its mouth is. It is not only encouraging citizens into buying gold bullion, but, in terms of central banks around the world, it is the largest purchaser of gold bullion.

It is important to note as well that, in China, which is true for citizens in most Asian countries, buying gold bullion is seen as a protection against economic turmoil, inflation, and the debasement of currencies.

I’ve been talking about the fact that, in China, along with other countries in Asia, the people have experienced the textbook definition of inflation. That is food prices, commodity prices, and real wage inflation; where the general prices of everything within their economies have gone up over the last few years.

Historically, these nations have experienced many currency depreciations and collapses, where often their money can buy a lot less than what it could just days before. Because of these experiences, the people of the East view buying gold bullion differently than the people here in America.

Therefore, when the average Chinese citizen sees inflation rampant everywhere, they know from stories passed on to them that it is time to be buying gold bullion. This is reflected in comments by the central bank of China itself, which stated that it is basically buying gold bullion because it is the only hard currency in the world.

It is any wonder then that many expect China to become the largest buyer of gold bullion in 2012?

While there are those who continue to proclaim that gold is in a bubble, the people of Asia—with China leading the way—are buying gold bullion in record amounts, as they seek to protect themselves from inflation.

Couple this with the fact that Asian central banks continue to be the largest buyers of gold bullion and one can see why, dear reader, that this is just one of the many reasons the bull market in gold bullion is set to continue.

The other reasons: many central banks aggressively increasing their money supplies, a decline in the value of the U.S. dollar because of so much debt behind the dollar and worldwide inflation…these make for a stronger argument that the gold bull market has a long way to go still. (Also see: Sharp January 2012 Food and Energy Price Increases Reason for Concern.)

Michael’s Personal Notes:

The European Union is making it official. It is now saying that the European Union as a whole will experience a recession in 2012, something I predicted in the first couple of weeks of January (in fact, back then I said that the eurozone was already in a recession).

The European Central Bank (ECB) had no choice but to alter its 0.5% growth forecast after weak fourth-quarter gross domestic product (GDP) numbers began to stream in from the 17-member countries of the European Union.

The current official forecast from the ECB, released just last week, is for the whole of the European Union to contract 0.3% in 2012. The ECB remains optimistic that growth can resume, because it sees signs of stabilization. It characterizes this latest forecast as a “mild recession” (I’ll believe it when I see it).

The Netherlands and Italy both experienced 0.7% contractions in Q4 2011 GDP from Q3 2011 levels. Austria’s GDP slid by 0.1% in the last quarter of 2011 while Spain’s GDP decreased by 0.3% in Q4 2011.

Germany and France both came in with GDP numbers that exceeded economists’ estimates, but, regardless, both countries remain stuck near the zero line of growth. Germany’s GDP contracted by 0.2% in the fourth quarter of 2011, while France reported positive GDP growth of 0.2%.

We cannot talk about the European Union without mentioning Greece, whose GDP contracted by 6.8% for all of 2011!

Portugal’s Q4 GDP in 2011 fell by 1.3%. Its economy, much like Greece, Spain, Italy and Ireland’s, continues to contract under austerity measures.

The ECB is quick to point out that the southern countries within the European Union that continue to struggle make the numbers look worse than they seem. The ECB points to Germany and France as performing much better.

Unfortunately, the austerity measures demanded by the European Union will ensure that Greece, Spain, Portugal, Italy, and Ireland will continue to struggle mightily. Since France and Germany depend on exports to those regions, their economies will continue to contract as well.

The ECB can say that European Union members Germany and France may avoid a recession, but GDP of 0.2% or 0.3% is very risky. It points to extreme weakness, with any hiccup sending both countries into a recession (which will occur in 2012).

Not addressing the issues ensures that growth cannot resume. The European Union maintaining the current course of austerity measures, in the hopes that growth will magically appear, can only ensure that the contraction will get worse. (See: Severe Austerity Measures in Eurozone Producing Opposite of Desired Effect.)

Dear reader, as the European Union continues to fall into a deeper recession, it is affecting China, which in turn will surely affect the U.S. Watch out for that stock market rally and for those saying we can escape what’s ailing the rest of the world.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average opens this first trading day of the week up 6.3% for 2012. The world’s most widely followed stock market index is up 102% since this bear market rally started on March 9, 2009.

We are getting close to the end of bear market rally in stocks that started nearly three years ago. I’m waiting for one final blow-off to the top for this bear market rally.

What He Said:

“I’m getting very worried about the state of the U.S. housing market and its ramifications for the economy. The U.S. could be headed for its first outright annual decline in home prices on record, adjusted for inflation. And I really believe this could be a catastrophe for the U.S. economy.” Michael Lombardi in PROFIT CONFIDENTIAL, August 2, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 two years earlier, in 2006. While senior economists and heads of central banks said that the U.S. housing contraction would not affect the remainder of the economy, Michael was calling for a catastrophe to the U.S. economy because of the housing bust he predicted.