2011-12-29

Is gold a bubble? Chinese gold frenzy edition

I haven't covered the Chinese gold demand too much, it's a story that's out there, but I think the demand numbers speak for themselves. On the one hand gold bulls like to point out Chinese demand, but on the other, this is also where one will spot a bubble. Earlier this week, the Chinese government moved to consolidate gold trading on the Shanghai exchange. There is undoubtedly more than one reason for the move. Most importantly, China wants to build Shanghai into a global financial center and this is typical policy in China: pick the winner. China's decentralized nature means many provinces and cities try to grab their share of the market, including financial services, but China's central government sees Shanghai as the future. This move guarantees profit and importance to Shanghai.

The other aim for the Chinese government is to tamp down a market frenzy. China Clamps Down on Gold Trading Frenzy
The notice — published on the central bank website (www.pbc.gov.cn) — said the Shanghai Gold Exchange and the Shanghai Futures Exchange are enough to meet domestic investor demand for spot gold and futures trading.
Existing exchanges or "platforms" were told to stop offering new services.
The PBOC cited lax management, irregular activities and evidence of illegality which were causing risks to emerge, as the reasons for taking the decision.
Sounds like the characteristics of a bubble. Chinese inflation expectations are very high and people started using gold as a replacement for property investment. The stock market recently hit new post-2008 lows and trades less than 30% above the 2008 low. To put that in perspective, this level equates to 850 on the S&P 500.

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