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Lesson from China: Using gold to protect against inflation

Pablo Paciello,
0 Comments|July 25, 2013

Yuan will not buy as much next year as it will this year
China's economy has been booming in recent years. Now the world's workshop, the so-called Middle Kingdom supports the second largest economy on the globe. And in the decades to come, China's middle class is expected to grow so large that it will actually outnumber the entire population of the United States. With China's economy growing at breakneck speed, the government has had to work hard to keep inflation under control. Still, even with government intervention, the simple fact is that the Yuan will not buy as much next year as it will this year. China is fighting inflation issues and many investors are turning to gold to safeguard their wealth.

The last few days have seen some strong gains in gold as investors in China have parked their assets in the commodity to protect themselves from both inflation and weak economic data. In specific, an announcement from the Chinese government that inflation rose by 2.7%, compared to an expected 2.5% rise, sent funds flooding into gold. This rise in inflation means that goods are becoming more and more expensive. Thus, anyone who holds onto Yuan risks watching their wealth melt away. Many investors are now turning to gold to safeguard their wealth.

These gains come even as the U.S. government contemplates ending its quantitative easing efforts that have kept the dollar down. When the American government decides to ease off of quantitative easing, some analysts expect investors to pull their money from commodities and other investments to park funds in the dollar. While this does represent a short term risk to gold investors, any drop in gold prices will likely be temporary as markets stabilize around the U.S. Dollar.

Why do investors turn to gold in times of need? Throughout history gold has proven to be a wise investment. For one, the physical attributes of gold make it resistant to wear and tear. Simply put, what you buy today is what you will have tomorrow. Other metals might change as they oxidize or could become scuffed, but gold is highly resilient. Two, gold has numerous properties that make it valuable, including its beautiful shimmer has always attracted the human eye.
Beyond investments, the growing middle class in China is also creating demand for gold jewelry. Remember how we pointed out that China's middle class will likely one day outnumber the entire population of the United States? Those hundreds of millions of people will also be the type of people who can afford and will want to purchase gold jewelry. As consumer demand rises, gold prices will also rise. Gold is a limited commodity, and while most people who invest in gold, invest in bullion, increased demand for jewelry will prop up bullion prices.

Other major gold purchasing countries, such as India, are also facing high inflation. Investors in these countries will also likely demand gold in order to protect their wealth from inflation. Indeed, demand for gold has been rising in India as inflation has surged to nearly 10 percent. Across the world, inflation has been on the rise in many countries. While conditions vary from country-to-country, inflation will likely continue to grow in the months to come.

If you live in a country that is experiencing high inflation levels, such as China or India, gold could be a great way to protect your wealth from inflation. Even if you live in a country or region that is not experiencing inflation, rising demand for gold from other regions could make the commodity a great investment. So if you are looking for a great investment opportunity or a way to protect your wealth, gold is definitely worth your consideration!

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Tags: ETF

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