The quite simple case for getting gold

Gold came under some selling pressure earlier today but has rebounded and is trading $7 higher to $2524 in what would be the highest daily close ever.

Since hitting an intraday record high of $2531 last week, the noise around the gold market has been remarkably quiet, which is a good thing in a bull market.

Why many are struggling to buy gold, despite imminent Fed rate cuts, is that the causes of the gold rally aren’t clear. A big one is that the US weaponized the dollar following Russia’s invasion of Ukraine and that’s compelling — especially with China’s central bank building gold reserves — but there’s an equally compelling reason for gold.

The simple case for gold

Say you’re a wealthy Chinese investor sitting on cash, what do you do?

1) Real estate

This was the obvious answer for decades. Money piled into real estate, driving huge gains but ultimately building ghost cities and leading to a remarkable bubble that the government is actively trying to deflate. That’s led to falling prices and a reversal in the mania. Currently, it’s uninvestable.

2) Stock markets

There was once a time when Chinese equities offered great returns but those days are nearly a decade in the rear-view mirror. The Shanghai Composite is the worst-performing global index once again this year and has been dead money since 2015. High-flying tech companies are trading at absurdly low valuations but Beijing is determined to squeeze the life out of them. Again, uninvestible.

3) Commodities

Commodity investing in China took on some different characteristics than elsewhere with things like iron ore and rebar futures heavily traded. With the slump in the Chinese economy, those and others have been in bear markets, as have producers. Surely there are still trades available but the easy money is long gone and is certainly less popular.

4) What’s left?

Capital controls mean Chinese investors can’t invest in many places, though they’re trying. There have been some huge NAV dislocations in foreign-focused ETFs but the pickings are slim. The signal is that there is intense demand for some kind of diversification.

5) Gold

Not all the money is flowing into gold but physical gold is available in China and when you compare it to the alternatives, it shines brightly at the moment. Recent reports highlight higher import quotas for Chinese banks for investment gold and that’s a tell. The higher price is also creates its own momentum.

To me, there’s no mystery here — Chinese money will continue to flow into gold. Now that could chance if the government offers real stimulus, some backing for capital markets and/or help for real estate but until that happens, gold is doing its job as a safe store of value.