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China and Gold Prices

chinaHave you ever wondered what impact nearly 1.5 Billion people could have on the gold market?  China is the world’s fastest growing economic force and they are making their might known in the gold markets in a very big way.  The reason why has very much to do with the recession which seemed to start in the American real estate and banking industries and spread like wildfire throughout the world.  Here’s how it is playing out.

A senior economic researcher for the Chinese Communist Party has now called for the making of more and bigger gold purchases in order to diversify away from the American dollar, which the researcher, Li Lianzhong, who believes that the dollar must fall with the printing of more cash by the U.S. Treasury in order to finance the deficit spending being ordered by U.S. President Barack Obama.

“Should we buy gold or U.S. Treasuries?” he queried.  “The U.S. is printing dollars on a massive scale, and in view of that trend, according to the laws of economics, there is no doubt that the dollar will fall.  So gold should be a better choice.”

Gold has been hanging around the $940 per ounce mark recently, although when oil prices rose this week, gold rallied slightly as well.  Early this year, it reached the $1000 per ounce mark, well ahead of predictions by many analysts and “experts” who foresaw the precious metal hitting that mark by early in the final quarter of 2009.

But it grows more interesting.  China undermines its own investments in the dollar as well as other monies and commodities around the world.  The massive nation has invested in Singapore energy supplies, purchased a Swiss oil exploration company and lent $45 Billion to Russia, Venezuala, Brazil, and Kazakhstan in exchange for long-term oil supply deals.   The “black gold” is considered a hedge against the devaluation of the American dollar.

Here’s where it stops making sense: if the Chinese undermine the U.S. dollar, they hurt themselves because they’ve already purchased the dollar themselves, in massive quantities.  If the dollar loses money, their investment drops, too.  The Chinese therefore would do well to shore up the dollar by purchasing more of the dollars on the world market.  Instead, they are buying gold.

It appears they are smiling and talking of support, but slowly slipping out the backdoor towards their nearest jewelry store and investment gold dealer.

And in monetizing gold in this fashion, they will have been first in the market, but in buying the amounts that they do, almost certainly drive the price upwards.

No one believed the price was permanently stalled at $940 per ounce and now we see at least one investor that is willing and capable of driving the market alone and for a very long time to come.

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