In my kleptocracy post I described how the range of investments available to the median Chinese family is limited. They can’t take their money offshore (unless they are rich enough to afford casino junkets). The local stock market is rigged. There is no worthwhile mutual fund market. They can own see-through apartments. But their main saving mechanism is bank accounts and life insurance contracts (life insurance being a bank account proxy).
Rates are regulated – low. Inflation is high and ex-ante the return to Chinese savers is negative.
Despite negative real returns Chinese save in huge quantity. This may be because of the “four grandparent policy” as described in the kleptocracy post or because of gender imbalance (as described in the follow up post).
Whatever: in China we have huge quantities of savings at ex-ante negative real returns in some sense compelled by local social and political structures.
This pool of savings (part of what Ben Bernanke once described as the “excess of global savings“) has global implications – and these will be explored in a forthcoming posts.
But here I state the obvious.
If you were forced to save huge amounts of money at negative real rates of return wouldn’t gold look attractive?
There is no data I would trust on how much gold has been socked away by middle-income Chinese. Being a kleptocracy where government officials expropriate land, hydro dams and any other private assets they take a fancy to, the gold buried under the house is hardly going to be declared to official statistics collectors.
But it is there in some quantity.
Gold is a market I have studiously taken very little interest in. I agree with Warren Buffett – that it has no real return over very long periods and is thus unattractive. But in China no-real-return is a good return and until recently I had not thought about that clearly.
If people have a decent knowledge of the non-official gold-market in China please leave it (anonymously if you wish) in the comments.
Observations on gold demand in China now and in the future
I have no knowledge of the specifics of middle income people trading gold in China.
But I do note that inflation in China (with regulated low interest rates) is likely to be strongly positively correlated to gold demand in China.
Inflation in China is clearly declining right now (which is very bad for Chinese gold demand). However I do not think that falling inflation in China is likely to be sustained. Low inflation would result in the collapse of many State Owned Enterprises (and probably the regime) – and the regime is the hand that holds the printing press so to some extent inflation is a choice for the regime. They will print. And print. Their very lives depend on it.