Chinese Gold Demand Booms As A Looming Dealer Default Could Cause An Even More Dramatic Increase In Gold Imports

Summary: There is a widespread problem with the lack of accuracy and truthfulness in reporting about the gold market. One example is a recent Reuters’ article that is filled with false citations. If there is a widespread default by Chinese gold borrowers, contrary to Reuters, that will put heavy upward pressure on prices. Physical gold demand in China continues to boom even in the midst of economic hardship. In spite of booming demand, especially in China, gold prices will rise only when the “gold supplier of last resort” physically or politically exhausts its ability to fill growing deficits.

There seems to be a widespread problem in the mainstream media. Either writers are not checking their facts, or more ominously, they are intentionally spreading falsehoods. A recent example of this can be found in a Reuters article titled “Cracks appear in China’s gold leasing trade as jewelers suffer defaults”.

According to the article, Chinese banks are growing alarmed by a rising number of defaults on gold loans made to jewelers. Allegedly, they are reviewing gold lending more carefully. It is true that the top four Chinese banks have up to 443.4 billion yuan ($69.63 billion) tied up in gold leasing but that’s about as far as it goes. Yet, according to this Reuters “journalist”, a pull back in gold lending will adversely affect China’s gold imports and “hit global bullion prices.”

The article was read by tens of thousands of western investors, many of whom will believe the statements made in it. These investors will make incorrect decisions based upon incorrect information. Specifically, this particular article cites patently false information to back up the writer’s premise that a widespread default in gold loans will cause Chinese demand for gold to fall.

Anyone who has studied economics knows that, during the first stages of a debt crisis, when borrowers begin to default on loans, increased demand for the currency needed to repay the loans, forces the value of the currency up, not down. We have seen this during the European debt crisis, where defaulting mortgage loans, denominated in Swiss francs, have driven that currency upward.