The Bullion Report For September 14, 2011: Turning East

News of a potential Chinese bond purchase in the Euro zone sparked an awful lot of headlines to start this week. Amid investor speculation, there is no greater monkey wrench than fundamental news out of China or India. Why do I say that? Because with such a force of funds and population those two Asian nations can wield a lot of demand potential, and that has often held the power to sway prices of many things. Among the markets that can move to the beat of this news are precious metals.

I have mentioned India in previous articles because it is such a massive area of physical gold demand, especially this time of year when weddings or festivals could fuel increases in imports. In the US there are also distinct seasons we might consider key for jewelry purchases or gifts (think: Christmas, Valentine's Day, etc.) but not with nearly the scope that India does. In the last few years this trend of watching their imports has only strengthened I think, due in part to what many analysts have seen as the growth of the middle class. The development in India has enabled many families and individuals the benefit of a higher level of disposable income for buying gifts and precious jewelry.

Another analytical point I see brought up is that farmers in rural areas have been fetching higher prices for some crops, which in turn gives them a bit more income to buy gold and silver. In rural areas this can serve as a store of that harvest season wealth. Again, there is a strong cultural link to the ownership of precious metals.

China has similar fundamental fuels for its demand drive in precious metals. These are not the only commodities that see a spotlight on Chinese demand. The main point on which the two countries seem to diverge is the interest in whether or not China is using gold as an alternative to the US dollar in its reserve. A recent release from Wikileaks seems to suggest that there is a concerted effort to do this at the expense of the US dollar. China may be among the top holders of gold in reserves, (number six, with over 1,000 metric tons according to the latest info from the People's Bank of China) but when looking at the size of their reserves, the actual percentage allocated to gold is much smaller than other developed nations. For example, the US has more than 74 percent of its reserves as the yellow metal. Germany has just over 71 percent. China's represents more like 1.6 percent. That isn't a lot considering they are the world's largest gold producer. If the central bank moves to add gold to their reserves, there is plenty of wiggle room in those ratios against foreign currencies. And that could mean plenty of upside potential just in bank demand.

Remember, just like in India, there is a decent amount of demand from regular citizens in China as well. India and China make up for more than 50 percent of the world's total physical investment demand (bars and coins), and more than half of the jewelry demand, according to the second quarter report from the World Gold Council. Continuing weakness on the global scene could easily propel more interest from these consumers. Inflation issues could also stoke the fires of demand in both nations as the growing middle classes move to preserve assets with precious metals as an inflation hedge, just like investors in western nations have been known to do.

Summary

It does seem to be redundant at this point to mention China and India as a hotbed of precious metal demand, but their needs and imports will likely impact prices and perceptions in the coming months. Europe and the United States continue to work to resolve their debt issues and economic trouble spots. China and India have to deal with price inflation. These things are what helped propel gold and silver to fresh market highs. Whether or not these two very populous locales continue to import and gain demand bases for both metals will likely provide key price support long after stimulus packages and job and morale boosting bills move through lawmakers' hands. Investors and everyday folks in urban and rural areas of Asia have probably seen their faith in traditional investments shaken as the global economy collapsed. That is the kind of fundamental nod that could keep prices finding footing on any sell-off.

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Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.