Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Actions Speak Louder Than Words: China Set to Buy More Gold

Thursday, August 23rd, 2012
By for Profit Confidential

Central banks are hungry for gold bullion and there is an overwhelming amount of evidence that suggests gold bullion prices are about to head higher. The demand for gold bullion from central banks has increased; China in particular has been making more news in this area.

Central banks’ appetite for gold bullion doubled in the second quarter of 2012. The central banks bought 157.5 metric tons of gold bullion in the second quarter. The reason for this recent spree of gold bullion buying was to diversify their foreign exchange reserves. (Source: Market Watch, August 17, 2012.) Central banks don’t seem to be relying only on the U.S dollar as much—and I wonder why.

Gold bullion accounts for 1.6% of China’s $3.2-trillion foreign exchange reserve, compared to the international average of about 10% of foreign exchange reserves in gold bullion. (Source: Financial Times, August 17, 2012.)

There is speculation that China’s central bank is planning to buy at least 5,000 to 6,000 metric tons of gold bullion over the next two years and it will start purchasing that gold bullion this year. Keep in mind that the average production of gold bullion mines is about 2,602 metric tons per year, according to World Gold Council.

A simple calculation would show that, if the central bank of China is planning to buy 5,000 to 6,000 tons of gold bullion and the total gold bullion production of the mines is 2,602 tons per year, this suggests that the Chinese central bank will be buying more than a two years’ supply of gold bullion produced.

China’s appetite for gold bullion is as strong as ever. In the first two quarters of 2012, China’s inflow of gold bullion from Hong Kong increased six times! In addition, the imports of gold bullion from Hong Kong were higher by 65% in April, compared to March. (Source: Mineweb, August 9, 2012.)

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More evidence of China adding to its gold bullion reserve: China National Gold; a state-owned miner, is looking at buying Barrick Gold Corporation’s (NYSE/ABX) interest in a major African gold mine. This would be the biggest gold bullion deal that China National Gold has ever done. (Source: Reuters, August 17, 2012.)

The Chinese central bank will never say when it’s going to buy gold bullion and how much, but from the looks of it, it is certainly spreading its wings.

As I have been saying in Profit Confidential, gold bullion is not in a bubble. There is true demand for gold bullion and I believe it’s bound to go higher. Central banks around the world are hungry for gold bullion and have doubled their demand. The Chinese central bank has been making moves that are a clear indication of its rising appetite for gold bullion. And I’m not sure China’s demand for gold bullion is presently reflected in the price of gold bullion…but that might change very soon! (Also see: “Why the Bull Market in Gold Bullion Is Far From Over.”)

Where the Market Stands; Where it’s Headed:

The number of stock advisors turning bullish has been rising quickly and we figure it could be at the highest level since April. This is another negative for the stock market. It’s a contrarian indicator. The greater the number of bullish stock market advisors, the more likely the stock market will head down.

Be careful with that stock market rally, dear reader; it’s a fake.

What He Said:

“I see a deal when it’s a deal. And right now there’s a good ‘for sale’ sign flashing on gold bullion and gold producer shares. In fact, after peaking at the $690.00-an-ounce level earlier this year, gold could be a bargain at its current price of around $650.00 per ounce. As a reader, you are undoubtedly aware of my negative stance on the general stock market and the U.S. economy. As the economic problems that continue to brew in the U.S., as these problems develop into others, and as they are finally exposed, what investment other than gold will worldwide investors turn to?” Michael Lombardi in Profit Confidential, March 14, 2007. Gold bullion was trading at under $300.00 an ounce when Michael first started recommending gold-related investments. Many gold stocks recommended in Michael’s advisories gained in excess of 100%.

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles

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