The Chinese government is making strategic moves that could have dramatic effects on gold's delicate supply/demand balance.
This maneuver could force gold prices screaming higher as hordes of new Chinese gold investors come clamoring into the market.
For investors today, the new measures promise at least two things:
- The gold bull market is secure with prices expected to continue marching higher.
- Companies with Chinese gold assets may be well-leveraged to take advantage of soaring domestic demand.
Here's how China's new gold strategy could fundamentally alter the global market... Plus two small gold companies that are hoping to profit with well-established positions in Chinese gold assets...
Gold: The China Impact
The Chinese government just announced that it will allow more of its domestic commercial banks to import and export gold.
Up until now, the international trading of gold was restricted to only five of China's largest commercial banks. These include the Chinese divisions of HSBC and Standard Chartered.
But new regulations will allow smaller financial institutions to freely trade on the Shanghai Gold Exchange and internationally.
The liberalized trading rules will eventually give hundreds of millions of Chinese citizens new access to gold-linked investment products.
And this creates the perfect scenario for gold's price to finally soar over its inflation-adjusted record high of $2,500 an ounce.
China's gold market liberalization sends a strong demand signal and it's very positive for the price of gold. It is a structural demand shift which must result in higher gold prices as the global equation has changed now significantly with more gold consumers and investors.
� LGT Capital Management, voted "Private Equity Manager of the Year" 2007-2009
The international gold market is now paying a lot more attention to China's gold demand, not just from an official reserve asset perspective, but also private demand. Behind India, China is the second-largest physical consumer. Therefore any step to integrate, liberalize, and expand this market should, in time, foster a rising appetite for gold.
� UBS, the world's second largest manager of private wealth assets.
The demand for gold in China has already increased during the first half of this year as concerns over the global economic recovery spurred investment.
China National Gold Group Corp., the country's largest state-owned gold producer, even reported a 40% increase of gold bar and coin sales over the past six months.
The total volume of gold traded on the Shanghai Gold Exchange jumped 59% in 1H 2010 to a stoutly 102.1 million ounces (3,175 tonnes).
China's gold investment demand market is strong. But only 0.00197 ounces of gold are currently bought annually per person for investment.
But rising personal incomes and a higher standard of living for hundreds of millions of Chinese will continue to encourage legions of new investors into the gold market.
The New Chinese "Golden" Class
The Chinese people are well known to be earnest savers. The average savings rate in China is 30% to 40%. Compare this to the average 6% savings rate in the United States.
But according to the World Gold Council, U.S. gold investment demand per capita is 5.6 times higher.
The people of the United States are not the biggest investors of gold. That title belongs to the Indians.
But if the Chinese began buying gold for investment purposes on the same level as Americans, total world gold demand would shoot 10.2% higher.
World Gold Investment Demand
- World investment demand for gold has increased 250% in the past ten years.
- Sales of official gold coins like the American Gold Eagle have increased 618% since 2007.
- Gold demand for ETFs has increased 20,470% since 2002.
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This could throw the delicate supply/demand balance into a sharp deficit as another 12.4 million ounces (351 tonnes) would be required from global gold supplies, which have already failed to significantly increase in almost two decades.
Right now, China is the world's largest gold producer. China's gold production dropped almost 3% in July to 31.1 tonnes. However, Chinese gold production during the first half of 2010 was up 10% to 159.2 tonnes.
The country is expected to increase mine production by 5% this year to 330 tonnes, again solidifying the nation's position as the world's #1 producer.
But despite the country's position among global gold production leaders, nationwide output will not be able to satisfy China's ravenously growing demand for gold as a safe-haven investment.
The demand for gold in China increased 26% in the second quarter of 2010 amid booming interest in retail investment demand for gold. Nearly half of gold demand in China came from the retail investment market, which increased 25% from the previous year.
And this is exactly why the Chinese Government recently decided to "increase the number of commercial banks who are qualified to import and export gold" and warm up to foreign investment. It allows the country to more effectively balance the supply and demand of gold.
In the past, the Chinese government has specifically encouraged its citizens to own gold and silver.
Last summer, the Chinese government introduced the state's first ever opportunity to invest in official silver bullion. (video)
Recent de-regulation of China's mining sector and the streamlining of permitting and approval processes has created a premier investment environment for mineral exploration, development, and production companies.
Dozens of companies are already working to quickly develop gold projects to supply the Chinese feeding frenzy for the yellow metal. Here are two companies that are quickly developing gold projects in China...
Mundoro Capital (TSX: MUN)
| Share Price: | $0.80 |
| Market Cap: | $31 million |
| Website: | www.mundoro.com |
Maoling Gold Project in the Liaoning Province
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Mundoro Capital is a well-financed and debt-free exploration and development firm focused on the advanced-stage Maoling Gold Project in Northeast China.
The company was invited into the country by the government in 1999 to help develop the Maoling gold deposit.
A Chinese joint venture company, Liaoning Tianli Mining Company Ltd., was formed to develop Maoling into a national model for large-scale, environmentally friendly, and economically sustainable gold mining operations. The joint venture company left Mundoro with a 79% interest in Tianli.
After three years of extensive exploration, which included the drilling of 176 holes totaling over 46,000 meters, the Maoling Gold Project is now a multi-million ounce, feasibility-stage gold project.
An official resource statement (published February 2006) estimated the Maoling gold deposit to contain 4.8 million ounces of gold in the Measured and Indicated mineral resource category and an additional 4.4 million contained gold ounces in the Inferred category.
For the past few years, Mundoro has been planning the development of a large-scale, open-pit mining and milling operation at Maoling.
However, the company has recently received letters from its Chinese joint venture partner suggesting the termination the Maoling gold project.
Without regard to its JV partner's suggestion, Mundoro says that it does not intend to end the joint venture and believes the work completed at the project proves it could be developed and sustained.
Inter-Citic Minerls (TSX: ICI)
| Share Price: | $1.31 |
| Market Cap: | $138 million |
| Website: | www.inter-citic.com |
Trenching at the Dachang Gold Project
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Inter-Citic Minerals is a gold exploration and development company that is rapidly advancing its 83%-owned Dachang Gold Project, a newly-discovered high-grade gold deposit in Western China.
A recently published NI 43-101-compliant update estimates that the Dachang Gold Project contains 1.88 million ounces of gold in the Measured and Indicated resource category and 1.51 million ounces in the Inferred category.
Last year, a Preliminary Economic Assessment estimated that total capital expenditures for the construction of a mine at Dachang would be just over $100 million. The assessment estimated production costs of about $400 an ounce with a total capital payback in under two years. Overall, the Dachang gold deposit is modeled to produce 165,000 ounces of gold annually for nine years.
Inter-Citic is currently drilling 25,000 meters into several new gold exploration targets. This year's exploration program is geared to expand the company's resource base and firm up final production models. Meanwhile, Inter-Citic continues to advance the feasibility and permitting processes for the Dachang mine.
The company's success has already attracted the attention of major mining investment firms including the Zijin Mining Group, China's largest gold producer with over 2.5 million ounces of annual output. With a market cap of over $20 billion, Zijin recently acquired 19.15% of Inter-Citic.
Other investors include two Hong Kong tycoon families, which own approximately 30% of the company.
So, In a Nutshell...
Gold prices will be bolstered by the liberalization of China's new international trading rules that will give hundreds of millions of savings-smart citizens access to gold, the universal safe-haven.
New measures will also continue to strongly support foreign investment. And companies with well-established positions in Chinese gold assets may be leveraged to take advantage of sharp increases in local demand.
