(Kitco News) – While this has not been widely reported in the Western media, news broke this week of a massive illegal gold-futures trading scam in China. Not only does it underscore the growing hunger for gold among the newly minted Chinese middle class, but also hits home the rationale for owning physical gold, according to one U.S. based asset manager.
Over 5,000 investors were bilked out of 380 billion yuan, or $59.62 billion in a scheme involving Loco London gold since 2008, according to a report in the China Daily.
While details are unclear how the scam worked, the implications could be bullish for gold in a number of ways. Perhaps gold prices could be at even higher levels than they are right now, if this money had been properly invested.
“That is obviously a very significant amount, this is an enormous scam,” said Adrian Day, president of Adrian Day Asset Management. Looking ahead, Day noted that “It might make Chinese investors turn towards the physical rather than esoteric contracts.”
“I don’t think it will make Chinese people not buy gold, it will just make them want to buy physical gold and keep it,” Day said.
The newly minted Chinese middle class has a natural cultural affinity towards gold, it is a cultural distinction that many Westerners underestimate and perhaps don’t appreciate.
Looking at the most recent physical demand information available, gold demand in China skyrocketed to record levels in the first quarter of 2012, according to a report from the World Gold Council.
Additionally, China is expected to overtake India as the largest market for gold this year.
Consumer demand in China surged by 10% to hit a new quarterly high of 255.2 tonnes, according to the World Gold Council’s Gold Demand Trends first quarter 2012 report.
Additionally, Chinese consumers were active buyers of gold jewelry in the first quarter, buying 156.6 tonnes, accounting for 30% of global jewelry demand, according to World Gold Council. That is an 8% year-over-year increase. Rising Chinese income levels are a key factor seen.
“Chinese gold demand is on track to expand by seven percent to 870 tonnes this year. On its current path, China will likely surpass India as the single largest market for gold in 2012,” said Marcus Grubb, managing director at the World Gold Council.
“Gold demand in China has grown consistently over the past several years driven by the liberalization of the Chinese gold investment market, the introduction of innovative gold savings accounts and a strong interest from Chinese citizens in buying gold to preserve wealth,” the World Gold Council’s Grubb added.
While physical demand had dropped off in the U.S. early in 2012—some gold watchers point to the higher price levels seen in the first quarter as a factor depressing coin demand. After all, August gold futures hit a peak at $1,797.70 in February of this year. Savvy traders don’t like to chase. Savvy traders like to buy on dips.
Looking ahead, Day highlights factors which will keep Chinese citizens headed to the gold dealer. “We think the Chinese yuan is undervalued, but for the Chinese, their currency isn’t rising. They have negative interest rates in a bank, and they don’t really trust banks anyways.”
While the summer doldrums may have hit the gold market and as gold lumbers along in fairly narrow ranges, gold is over $200 per ounce lower than in the first quarter. “I am using these dips to buy more,” concluded Day.
While there are many uncertainties in financial markets and trading—probably one certainty that investors can count on is that there will be another crisis and yet another. The human condition of greed and fear seems to propel that on-going cycle. Students of market history are well aware of the Tulip bubble in the 1600s and the South Seas Company bubble in the 1700s.
More recently, individual investors around the globe have lived through a number of financial crises. The U.S. technology dot.com bubble bust in the equity market, the U.S. real estate collapse, the collapse of Lehman Brothers and the global financial crisis in 2008, and the European sovereign debt crisis, which is still unfolding.
Unfortunately, scams, frauds, bubbles are unlikely to go away. Many investors feel that physical ownership of gold is one way to protect and preserve assets. Something to consider.