Chinese Gold Fever Effect on Gold Prices

Gold Fever China

Some of the official Chinese press doubted the numbers released recently about Chinese housewives buying 300 tons of physical gold.

They argued that these numbers cannot be accurate, as it needs more time to collect these data. To tell you the truth, they are right about that. Bureaucracy can’t end overnight in large country such as China, so the numbers credibility is shaken. Still, there has been a good rise in the physical gold sales, not just in China, but the U.S. and Europe also reported similar news.

The argument starts by saying that China’s total production of gold peaked last year reaching 402 tons, while consumption recorded 832 tons. Therefore, buying 300 tons in just 10 days seems highly unlikely.

Will the physical buying affects gold prices?

Everybody asks this question, which is the meaning of China buying 300 tons or 3 tons of gold in 10 days.

Gold prices are affected directly by the prices of gold in future market, not the current demand on physical gold. It is an important physiological factor, but it’s not the critical factor Wall Street Hawks see. A more critical factor is the economic performance of the world’s superpowers, the U.S. and Europe, and the value of the American currency, the USD. After analyzing the U.S. data, investors re-value gold and determine its current and future value, relative to the USD.

Another direct factor is the physical gold supply from central banks. These big boys sell gold in tons, making 17% of the above-ground supply on their own in 2011. This year, with states on the verge of defaults, they remain a possible big supplier that could cover for the gold production shortage. These big boys sell gold to other major big players in the market, ETFs producers and stock brokers. They have a greater effect on the gold market than the simple consumer.

The bottom line is physical buying from Asia affects gold prices, indirectly and psychologically. It has no direct effect on the numbers we see on the screens of trading platforms, this number is influenced by other factors. Still, investors are humans and their actions are driven by the news they see and how they feel. Investors are not emotionally-proof machines that gossip and rumors can’t affect them.