China steps up silver purchases

By Dr Jeffrey Lewis

Carefully hidden in the depths of a recent Forbes blog was perhaps one of the most important stories for all of 2011, at least for silver. Robert Lenzner wrote that “China’s Industrial and Commercial Bank (ICBC) reports purchases of physical gold and gold-related investments are growing at record setting rates.”

The post goes on, “In January alone ICBC sold 7 tons of gold– almost half the 15 tons it sold in all of 2010. It also sold 13 tons of silver in January– almost half the 33 tons of silver it sold to clients during the past year.”

Of course, it wasn’t much further in the article (it was actually the next sentence) that the media spin begins to show through in a quote from Zhou Ming, the head of the precious metals department of the ICBC. The quote essentially declares gold and silver to be the new speculative market in China after real estate was essentially shut down to leveraging.

Real estate vs. silver
While it is true that silver may be a replacement market for Chinese investors, the products aren’t exactly as much of a substitute for one another as the media would like. Most investors know that real estate is purchased primarily for income, while gold and silver are for wealth protection. That understanding gets lost on the press, even media that is supposed to be finance-related, but it can be shaken off.

The most important part of this story is that even if Chinese investors are finding silver and gold to be an applicable substitute for real estate, investors are obviously worried about inflation. Recently, China recalled information about the status of its real estate markets, and there is little doubt that China’s inflation numbers are equally fudged.

If we are to take China’s numbers at face value, it can be concluded that, at best, the rate of inflation is still several whole percentage points higher than current deposit rates, a sign that the currency is under serious stress.

Perhaps hilariously, though, is that while China inflates like there is no tomorrow, the value of the Chinese currency continues to rise against the US Dollar. It doesn’t get much more obvious. Inflation is an international sickness, and it is only those in metals that are truly shielded from its devastating effects.

Time is running out
While silver and gold are limited in supply, they will always exist. They will not, however, always exist at an affordable price.

While no one could expect that gold and silver would rally in spring, the season that is usually the most forgiving to both stores of value, it is becoming evident that historical trends are easily rewritten by trying times. Silver recently broke $33 per ounce, and gold is looking toward $1400, maybe even $1500 by the end of the weakest season.

It isn’t as though gold and silver are an anomaly, either. Take into consideration the fact that gas prices are at seasonally-adjusted records, despite record oversupply of oil. Shortage, or abundance, there is absolutely no shortage in the desire to inflate world currencies, and we’re already paying witness to the aftereffects.

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