If you’re worried about the U.S. economy, buy gold. If you’re not worried about the Chinese economy, buy some more gold. Why?

Mar.03, 2008 in Market Outlook, U.S Hot Stocks

China’s economy is in overdrive, growing 11.4% in 2007. Check out the numbers…

The McKinsey Quarterly reports:

By 2010, 40 million households will earn more than 48,000 renminbi ($6,000) per year, equivalent to $24,000 in terms of purchasing power parity and enough to qualify a household as middle class by U.S. standards.

Meanwhile, the number of Chinese with at least $1 million in assets hit about 350,000 recently, and you can bet that number is increasing daily. (The number of millionaires in the U.S. is reported to be 9.3 million.)

China has a lot of catching up to do. As it catches up, gold will tag along. That’s because the Chinese cherish gold as the premier symbol of wealth and store of value.

What Our Grandparents Knew About Investing

During the tech boom…during the mad rush for China shares…during the hedge fund craze…even during the latest run on real estate…a lot of inexperienced investors got all the wrong ideas about how to build wealth.

For those market amateurs, it was all about the fast buck…about how well the Fed could manipulate markets with interest rates…and about a kind of entitlement idea related to wealth.

But you and I know that’s just not how it works.

Gold demand in China relative to GDP is about five times higher than in the U.S. And this robust demand is growing. Gold consumption in Mainland China rose 25%, to 78.9 tons, in the three months ending last September.

But the real opportunity for gold in China comes with China’s central bank. For several years, Yu Yongding, a committee member of the People’s Bank of China, has advised that China use its foreign currency reserves — the largest in the world — to buy gold. He’s not the only one. Other Chinese economists are urging their government to QUADRUPLE the nation’s gold reserves.

Isn’t it interesting that these recommendations arrive at the very same moment that the International Monetary Fund is seeking to dispose of its gold to satisfy budget deficits? China is accumulating tangible wealth while the West is squandering it.

Here are two points of interest…

China’s foreign reserves now stand at nearly $1.5 trillion — more than doubling in the past two years. More than two-thirds of that sum sits in U.S. Treasuries.
China holds less than 1% of its reserves in gold — 600 tons worth. By comparison, the U.S. holds 70% of its reserves in gold.
So the U.S. has 70% of its reserves in gold. Let’s say China puts just a THIRD of its foreign reserves into gold. That would be $500 billion worth — or about five times the amount of gold the IMF hopes to sell!

And It’s Not Just China’s Demand for Gold… India’s Economy Is Growing, Too!

India is the world’s largest gold market. Consumer demand in the third quarter amounted to 185.1 tonnes — or more than twice the Chinese demand over the same time frame. And during the first nine months of 2007, Indian demand totaled a staggering 500 tonnes, according to the Khaleej Times.

Driving that gold buying is a booming Indian economy. India is the world’s fastest growing major economy after China, and its GDP grew at a rate of 9.4% in the fiscal year to March 2007, which, according to The Economic Times, was “its strongest pace in 18 years.”

Household income in India is growing at a double-digit pace. A lot of disposable income means India’s middle class — which is larger than the entire population of the United States — is buying everything from cutlery to cars to air conditioners…to gold.

So the yellow metal may be headed to $1,000 very soon. It’s sitting about $15 shy of there, as I write this. But don’t expect it to stop there.

Kevin Kerr

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