Is gold a bubble? The answer is somewhere in China

Gold records brisk sales during Spring Festival holidays
Gold sales at Beijing Caibai, a popular jewelry department store, increased tremendously during the holidays and were much better than the same period last year, a staff surnamed Niu at the sales and strategy department at Beijing Caibai, told the Global Times yesterday.
"We sold one gold necklace per minute on average during the peak time," Niu said.
That store is the one I visited and discussed in my post, China Gold Frenzy.
"Many Chinese people lost lots of money in property and stock investments in 2011, so they prefer to buy gold to maintain the value of their savings amid high inflation," Liu Yangyi, a trader at the Shanghai Gold Exchange, told the Global Times yesterday.
"Besides, Chinese people have a special feeling toward the dragon, and sales of the gold jewelry in the Year of the Dragon are much better than in other years," Liu said, adding that the sales boom will normally last till the Lantern Festival, or February 6 in the case of this year.
Chinese are turning to gold because the stock market bubble deflated and the real estate bubble looks set to deflate. Chinese demand is about 25% of global demand for gold and they will keep buying as long as the price increases. There's certainly a bullish case to be made for gold and it remains a good asset to hold as insurance when central banks are printing money. Still, many Chinese are chasing the latest hot investment and one has to consider how that demand holds up if there's deflation in China. On the plus side, gold demand is strong worldwide and it's a relatively small market. A weak real estate market in China may send more investors into gold. On the negative side, Chinese could be heavy sellers if gold declines and stays down.

In sum, the behavior of the Chinese says bubble. The nation rushed into stocks, then property, now gold. This is what we saw in the U.S. and developed markets as excess capital moved from one market to the next. The big question for gold is whether the decline in social mood will include a loss of faith in paper currency. If yes, then gold can become the bubble asset of the decline—albeit a bubble that has not even begun to inflate. On the other side, if you expect total deflation, then gold will go down with other assets and we're just seeing one of the last investment frenzies before the collapse.

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