Zeev's Turnips Patch-No Politics (ZEEV)

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*** Richard Russell and The Chinese Connection ***

Good morning ml,
In my view, there are few, if any, sets of circumstances that will propel the PoG to what I feel will ultimately be wildly bullish levels than that of the China's citizens finally being enabled (encouraged?) to own gold.

There is a wealth of coverage on this development, and I'm sure I'll have more on this subject throughout the day.


Enter the Dragon
Richard Russell
Dow Theory Letters
May 13, 2003

Extracted from the 12 May 2003 issue of Richard Russell's Dow Theory Remarks

To my mind the best news magazine in the world is the London Economist. How their staff puts out this information every week is amazing. I thought this article from the current (May 10-16) issue of the Economist was so important that I wanted to start the site with it. The implications of what you will read next are enormous.

I call it ENTER THE DRAGON --

(From the Economist) -- In uncertain times, gold still retains a special lustre for some investors: although its price has fallen back from recent, war-spurred highs, it is fetching about $340 an ounce, up from $280 at the beginning of 2002. Yet gold's golden age, so to speak, is long gone. Since the 1970s it has become almost like any other precious metal, and increasingly one that central banks no longer care to hold in reserve.

That is why the gold industry is looking to China in hope. For decades the country severely restricted the buying and selling of gold, which put a heavy damper on demand. Now, however, China is liberalising. When India did likewise in 1996, it promptly overtook America as the world's largest consumer. China, now in third place, might also begin to climb the league.

Until last year, its central bank fixed the domestic price of gold. It bought all the gold produced by China's 1,000 or so mines and allocated it to jewellers. This ended in October when a gold exchange opened in Shanghai where producers and wholesalers trade directly with one another. In March, the central bank went further and gave up its power to license producers and retailers. Now anybody can enter the gold business in China.

A far bigger change is planned for June, when individuals will be allowed to invest in gold, either by buying ingots or by opening gold accounts at their banks. China has one of the highest savings rates in the world, officially about 40%. But its mutual-fund industry and stockmarkets are fledglings, so the Chinese keep most of their money in humdrum bank deposits, which pay a miserly 2% in interest before tax. If India's experience is a guide, many will now shift their money into gold.

This will drive up prices inside China. Since Chinese demand (200 tonnes) already outstrips domestic production (190 tonnes), it will also lead to more imports. International trade, however, is one aspect that the central bank is not eager to liberalise. Its biggest task during this decade is to prepare the yuan for convertibility. But until that happens it will be wary of free international flows of gold, which could serve as a proxy for hard currency.

Still, even this is only a matter of time. "Gold has no boundaries," says Albert Cheng, a director of the World Gold Council, an industry body that has been lobbying the Chinese government for a decade. "If China's demand goes up, it will help everybody."

Russell Comment -- First the opening of the Shanghai Gold Exchange. Next month gold will be available to 1.4 billion Chinese. Does that sound like a random or casual policy change on the part of the Chinese government? Or is the Chinese government following a policy of encouraging its people to buy gold?

The Chinese were gold-savvy long before the creation of the USA. There's no question in my mind that China intends to be the major power in Asia. How will they go about it?

First, create the world's most wanted currency. The next step for China will be to make the Renminbi convertible. The step after that would be to back the renminbi with gold. A gold-backed fully-convertible currency (coming from a nation with a fiercely competitive economy, a very positive trade balance and a strong military) could rapidly become the world's most wanted currency.

Throughout history, gold has flowed to the strongest nation.

It's worth thinking about.

More follows for subscribers. . .

Richard Russell
Dow Theory Letters

http://www.321gold.com/editorials/russell/russell051303.html

Bolded emphasis mine.

Warm regards,
Dan