Worries About China Spread Beyond The Gold Market

There's now concern amongst equity investors. Both the Shanghai and Hang Seng indices are down more than 10% after the People's Bank of China announced its tightening measures. This Marketwatch story points out that Chinese shares, and the entire economy, may be in a bubble. Of note is the intimation that the recent growth pick-up has not been flowing to the bottom line of listed companies as it used to:

Dylan Grice, strategist with SG Securities in London, calculates that returns on investment assets in China have fallen to a paltry 5% -- about the same lowly levels as those in Germany, and less than half those seen in some other emerging markets, such as South Africa and Brazil.

Grice calculates that shares should be selling at 1.7 times book value; they're currently at an average of three times.


Would a PRC share collapse be bad for gold? Ostensibly, the answer would be "yes." A bear market presumably means the inflation party is over and disinflation is setting in. That shift would impel Chinese investors to shy away from gold.

There's just one point of doubt, gleaned from U.S. history. The U.S. stock market was lousy in the 1970s becuase the inflation back then didn't benefit companies' earnings all that much. Instead, the consequent bubble-raising force pushed up hard assets.

I make this note not to predict, but to note a potential head-fake. Given market sentiment right now, it's most likely that gold would be knocked down by a continued stock-market slump; said slump would indicate People Bank of China tightening is kicking in.