The Rise of the Gold Culture

Perhaps it is a coincidence that many emerging economies these days are the same ones that culturally value gold the most. Or maybe it is not a coincidence at all. In a world of out of control debt, currency devaluation and cronyism, it is not hard to envision stability, honesty and soundness coming out on top eventually. Countries where both individuals and banks accumulate and hold gold as a preferred store of wealth seem to be strengthening where fiat-worshipping economies are faltering. In turn, these economies will drive the price of gold to new heights in the not too distant future and Americans should prepare.

China is a force to watch in that regard. As the purchasing power and financial strength of the Chinese people grows, their demand for gold grows as well. Gold is integral to Chinese culture. In fact, one of the reasons the Chinese population is so large in the western United States is because many Chinese were attracted by the California gold rush in the 1840’s. The fact that they were also fleeing the poverty and political chaos caused by the Taiping Rebellion is not lost on them today.

Many Chinese citizens buy gold for the very same reasons Americans do – as a hedge against runaway inflation and a store of wealth. But gold is also a way to secure their wealth from government pilfering and meddling, in all the forms that can take. The Chinese economy still has many capital controls, and where it might make sense to keep some capital overseas, that is just not an option for many Chinese. Holding gold bullion and jewelry is a bit like a poor man’s Swiss bank account. This is deeply engrained in the Chinese psyche, so much so that it is a tradition to give gifts of gold on Chinese New Year, for luck, to preserve fortune and as an investment.

Perhaps the biggest emerging gold culture is India. They have an insatiable appetite for gold – so much so that for a while, the government enacted strict limits on gold imports due to a problematic account deficit. This quickly led to smuggling and a pretty fierce black market in gold. Smugglers in India began to act like drug mules here in the US! Think about it - Indians are as addicted to gold as Americans are to cocaine! They are THAT determined to get it! Since this restriction was lifted, gold has poured into India.

Indians allocate significant portions of their family budgets (roughly 8% on average) to gold coins and jewelry, not only for financial stability, but also religious tradition, making demand extremely inelastic. And, because of India’s economic and political history, they have much reason to rely on gold in anticipation of economic unrest.

While China is a huge demand center for gold, it is also the biggest producer of gold in the world. This mutes their impact a little on the global markets as they can supply much of their own demand. But India must rely on imports to feed its voracious appetite for gold. This compounds India’s outsized role in world gold markets.

The only thing limiting Chinese and Indian demand for gold is the ability to buy. The Chinese and Indian standards of living continue to modernize and improve. That is a bullish trend for gold.

Of course, central banks in the emerging economic world are realizing the importance of gold in the aftermath of Greece and the trouble that rippled throughout the currency markets. Holding gold for them is a way to instill confidence in their currencies, which is crucial. If a fiat currency does not have confidence, it has nothing. And if the issuing bank has no gold in its reserves, it is just asking to collapse.

So as emerging markets continue to emerge, demand for gold will emerge right along with them. China and India are the two biggest examples, but there are others. These economies have seen troubled times. Currency crises, corruption and financial panics have etched the value of gold on the very soul of these cultures. These “gold cultures” will demand as much gold as they are able to buy. As their purchasing power grows, they will push up and support the price of gold.

Conversely, the United States and the dollar is still on top – but for how long? How long until the dollar’s reign is ended and the throne is taken over by another currency –a more solid and stable one, perhaps with a strong tie to gold? As emerging markets push demand and price for gold, Americans will be able to buy less and less as their purchasing power is diminished. Americans should buy more gold now while their purchasing power is high and the price is low.