Madoff-type Chinese Gold Bullion Scandal
Could Be Bullish for Gold Prices

A gold bullion scam in China, similar to the Bernie Madoff scandal here in the U.S. could be very bullish for physical gold bullion and gold prices.

Thirty-three suspects were arrested in China for illegal gold-futures trading that allegedly robbed up to 5,000 Chinese citizens of 380 billion yuan. (Source: China Daily, July 18, 2012).

Although details are not clear, at its core, this trading scam entailed investors buying pieces of paper that were supposed to represent physical gold bullion held in London.

Now, 380 billion yuan ($59.62 billion) is a lot of gold bullion! Had this money actually bought the physical gold bullion, it would have sent gold prices higher. Instead, the firm is said to have simply taken the money for itself, leaving the investors holding useless pieces of paper, which had no impact on gold prices.

A few years ago, the largest commercial bank in China launched a gold-backed savings account similar to 401(k) plans here in the U.S. (Source: Forbes, July 31, 2012.) Over two million customers have signed up and with China’s insatiable demand for gold bullion, as I’ve been writing about in these pages, this number is only going to rise.

As real estate prices fall in China, the Chinese people will be looking for places to park their money. Their trust of and reliance on gold bullion goes back centuries, which is why China is set to become the largest gold bullion consumer in 2012 and why gold prices will remain strong.

Even though the Industrial and Commercial Bank of China should be trusted to actually have the gold bullion to back the savings account, after this scandal, the Chinese public may think it best to buy gold bullion coins or bars themselves.

After all, the Chinese consumer bought 30% of all jewelry around the globe (or over 156 tonnes of it) in the first quarter of this year, with most of it concentrated in the 24-karat category—the purest form of gold bullion. (Source: World Gold Council.)

Although demand for China’s exchange-traded funds (ETFs) of gold bullion may fall because of this scandal, it doesn’t mean that the Chinese people are not buyers of gold bullion. It simply means that they will choose to buy the physical instead, which will of course be supportive of gold prices.

So, if you are concerned about gold prices falling, remember there is a strong buyer of physical gold bullion, which will in turn support gold prices. (Also see: “China Wants to Be a Major Global Trader of Gold Bullion.”)

Where the Market Stands; Where it’s Headed:

Today, we got news that Italy’s economy shrunk for the fourth straight quarter for the three months ended June 30, 2012. (Source: Instat.) The government’s implementation of $25.0 billion in austerity cuts is having a big impact on consumer spending in Italy.

The U.K is in recession. Spain is an economic catastrophe.

Combined, the three countries I mention above have an annual gross domestic product (GDP) of over $6.0 trillion, equal to about 40% of the U.S. GDP. But these are only three countries! Many other European countries are in recession.

But have no fear, dear reader; stock prices in America are rising.

What He Said:

The year “2000 was a turning point of consumer confidence in high tech stocks. 2006 will be remembered as the turning point of consumer confidence in the housing market. That means more for-sale signs going up, longer time periods to sell homes, bloated for-sale inventory, and eventually lower prices for homes. But this time, the turnaround in consumer confidence will have a bigger impact on the economy. Hold onto your seats; this is going to be a nail biter.” Michael Lombardi in Profit Confidential, August 24, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.