Friday, November 27, 2009

China's Net Effect on Gold‏

Here are some more of my thoughts on China and gold.

There's a lot to be said about how the average Chinese investor's rush into risky assets helps prop up a potential bubble in precious metals and other asset classes. Many Chinese are buying stocks, real estate, and gold with borrowed money. This may set China up for hard times in the short run if one of those asset markets has a downturn and your average Chinese investor has to sell other holdings to meet margin calls or loan payments.

China is now the world's top gold producer, so they are able to encourage gold investment domestically simply by restricting the export of bullion. This has little to no net effect on the world spot price of gold so long as all domestic Chinese demand for gold can be directed into the supply they withhold from the world market.

Diversifying away from the U.S. dollar is China's long-term goal and buying gold (in both individual and national accounts) is but one leg under that strategy. Every once in a while gold permabulls make a case for gold prices going into the stratosphere. Gold has appeal in uncertain times but I wouldn’t overdo it. It's just another asset class to me. Too many gold bugs make the classic mistake of falling in love with an investment rather than putting it into the context of a larger portfolio.

Nota bene: Anthony J. Alfidi is long FXI, GDX, and ANV at the time of publication.