January 30, 2024 | Gold, When All Else Fails, Part 1: China’s Last Resort

Since the beginning of recorded history, people have viewed gold as 1) money and 2) something to be replaced by sexier financial instruments whenever possible. Today’s fiat currencies, for instance, exist because governments find creating “wealth” out of thin air much more fun than living with a fixed money supply.

And as financial markets have become more complex, new investment vehicles keep emerging that, for a while at least, replace gold in the popular imagination as the ultimate store of wealth. Consider the periodic rise of “one decision stocks” like the Nifty-50 of the 1970s, the dot-coms of the 1990s, and today’s “Magnificent 7” tech giants.

Meanwhile, real estate — since it’s both “real” and financial — also spawns speculative bubbles every time a government starts to inflate away an unbacked currency.

Those previous bubbles eventually popped, sending chastened capital back into real money.

Which Brings Us To China

The world’s second-biggest economy was, until recently, home to epic stock and real estate bubbles. But both are now popping. Housing is in free-fall (see Evergrande: Crisis-hit Chinese property giant ordered to liquidate), while stocks are in a grinding bear market:

Chinese stocks have lost $6 trillion in 3 years. Here’s what you need to know

(CNN) – Chinese shares haven’t just had a bad start to 2024. It’s been rough going since February 2021, when they hit their most recent peak.

Over the past three years, about $6 trillion — equivalent to roughly twice Britain’s annual economic output — has been wiped off the value of Chinese and Hong Kong stocks.

The Hang Seng index has crashed 10% so far this year alone, while the Shanghai Composite and Shenzhen Component indexes are down 7% and 10% respectively.

The astonishing losses, reminiscent of the last Chinese stock market crash of 2015-2016, highlight a crisis of confidence among investors concerned about the country’s future.

“The past three years were no doubt a challenging and frustrating period for investors and market participants in Chinese equities,” Goldman Sachs analysts wrote in a research note Tuesday. “China … [is] currently trading at suppressed valuations and decade-low allocations across [investment] fund mandates.”

The world’s second-largest economy is plagued by a myriad of problems. They include a record downturn in real estate, deflation, debt, a falling birthrate, and a shrinking workforce, as well as a shift towards ideology-driven policies that has rattled the private sector and scared away foreign firms.

The stock meltdown has made Chinese markets the world’s worst performers so far this year. All this is playing out against the backdrop of a global stock market rally, led by Wall Street’s record-setting run, and by Japan in Asia.

Back To the Last Resort

What do increasingly traumatized Chinese do when their bubble assets implode? They switch to gold, the one thing they can definitely trust:

China’s gold imports surge to record high as appetite increases, middle class seek wealth security

(SCMP) – China’s appetite for gold rose to record high levels last year, as investors sought to secure their assets and limit uncertainties caused by a weak yuan, an ongoing property slump and fears over a stock market rout.

Imports of gold for non-monetary use – products including gold jewellery – rose to 1,447 tonnes last year, breaking the previous record of 1,427 tonnes in 2018, according to the General Administration of Customs.

The weight marked a sevenfold increase from 2020, while the US$90 billion value represented an almost ninefold increase from three years ago.

With limited access to overseas assets, China’s middle class are seen to be attempting to preserve their fortunes, which have dwindled amid the slumping property market.

“Facing the property and stock market slump, global geopolitical instability, and the fall of the Chinese yuan’s exchange rate, gold purchasing is currently the best way for Chinese residents to preserve their wealth,” said Peng Peng, executive chairman of the Guangdong Society of Reform.

Coming To A Mismanaged Country Near You

Pretty much everything going wrong for China has either arrived or is circling for a landing in the US. Multiplying forever wars, stock and real estate bubbles, chaotic internal politics — how bout that Texas border — and soaring debt pretty much guarantee an environment in which Americans will face the same dilemma as their Chinese counterparts. And they’ll react the same way.

John Rubino January 30th, 2024

Posted In: John Rubino Substack

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