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Thursday, May 9, 2013

Chinese aunties buy gold to avoid the fate of the Russian babushkas

Will you become one of Obama's babushkas left to twist in the wind?
Posted on 09 May 2013 
Chinese consumers led by their old ‘aunties’ have reportedly bought over 300 tonnes of gold worth more than $16 billion since the price crash last month. There have been queues at the nation’s many gold shops.

Perhaps the Chinese aunties have heard the story about what happened to the Russian babushkas in the 90s.
Basically the babushkas are largely pensioners on fixed incomes and in the 1990s their income was devastated by a massive inflation that also destroyed the savings of the communist era. If only they had switched their money into gold then their savings would have been preserved.

Mao survivors

Don’t forget what a pensioner in China has lived through. Younger people know only the successes of the past 30 years. Some of the older folk had 40 years of Chairman Mao. They know just how tough hard times can be in China, a country with very little by the way of a welfare state.

The Beijing Daily newspaper commented yesterday: ‘Perhaps the majority of Americans cannot comprehend the unusual feelings Chinese people have toward gold and silver. They’ve never considered that rather than being afraid to invest in gold, the Chinese are more afraid that they won’t possess gold.

‘Maybe what Chinese aunties care about is not the price of gold tomorrow, their desire is perhaps nothing more than to buy gold, to delight in gold, to hold it. Chinese aunties’ gold investment strategies are simple and unsophisticated, they just buy what they want.’

A professor at the Shanghai Advanced Institute of Finance, Zhu Ning blogged: ‘Why are Chinese aunties so frenzied in their quest for gold? The primary reason is the limited options for domestic investments.

‘The country strictly controls real-estate purchases; money could be saved in the bank but interest rates are low, and taking into account inflation, there are hardly any profits, but mostly losses; it’s been only a few years since the stock market slump, with investors losing much of their wealth. So, after gold prices fell, many people thought of gold as a last straw investment and now eagerly anticipate a future rise in value. They only want an investment outlet.’

Real money

Gold as the ultimate and only investment? That is what happens when the world loses control of the money supply, and China gave its economy the biggest stimulus in history after the global financial crisis. The result has been hyperinflation (click here). What comes next is a savage deflationary depression.

Where you could criticize the aunties is that they are closing the door after the horse has bolted. Whatever the ludicrous official inflation figures say ArabianMoney was a bit shocked last month to find some prices higher in Chinese cities than in Dubai where tax-free salaries are many, many times higher.

However, we don’t see any reason to think this process is over. The gold price crash last month was another example of central bank intervention. The reality is that global money printing in 2013 is running at the highest level since the global financial crisis just over four years ago.

Things are getting worse, not better with money printing, and that will push the price of gold very much higher. The Chinese should look after their aunties who are going to become rich!