Last year gold prices have risen to an all time record price. But why? The simple and shortest answer is China. Many economists predict that soon China will become the country with the largest economy and the USA will become the second largest when it happens. Nevertheless there are some experts who believe that recent events in the economy of China may suggests otherwise.

The rise of gold prices last year is mainly the effect of China’s inflation in money supply. But first, let’s take a look on the history of money. Before we started printing paper money, we had gold, copper, iron and silver coins. Before that people traded items for other items of the same equivalent value.

It used to be that printed paper money was backed up by gold, silver, iron or copper. Sadly, not anymore! What is money then? Governments are printing money out of thin air. It has no value at all! Money doesn’t have any intrinsic value. It is simply pieces of paper.

A bicycle for instance has value because it can help you get where you need to go. Water has a value because if you don’t drink enough, you will most likely die. Before 1971 in the US, you could take your paper money to the government and exchange them for gold or silver. Once upon a time it used to count for China’s paper money as well.

Nowadays everything is made in China. If you own something that wasn’t made in China, it probably was made in Asia or it has one itty bitty screw made in China for instance. Since China is currently the world’s number one country concerning manufacturing, it’s no secret that they are cashing in a lot of money; at least they’re supposing to.

Currently China is the country that’s printing paper money at the fastest rate. China also has been the country with the largest money supply for the past decade.

Unfortunately there is a direct correlation between gold prices and inflation therefore as inflation rises, the demand for gold rises in China. Consequently gold prices will rise all over the planet. On a publication of Southern Weekly they noted that at the end of November 2010 the money supply in China grew with 19.46%. That same year the US had a 3.3% growth and Japan a 2.5% growth in M2. (M2 is the amount of money in circulation)

China has a long history of extreme money printing as they were the first country to introduce paper currency. One would think that they’ve learned their lesson, but evidently they still didn’t.

The Chinese along with other Asian countries are hooked on gold and have been for a long time. Specifically countries such as India value gold as much as China. Gold is considered to be a precious metal that Asians consider as “safety currency” against the dangers of inflation.

However there are other reasons why the Chinese are buying gold like it’s the end of the world. They buy gold:

1. A Prevaricate Protection from Inflation
Inflation is semi bad, but high-inflation is really bad because It grinds down the value of cash thus if you have a dollar today and prices rise 10% tomorrow it will now effectively only be worth 90 dollars. High inflation also happens to destabilize the economy. There are many more reasons but fact remains that old is a wise choice to make in inflationary economies.

2. No Faith in Paper Money
Due to the global market crash thanks to Wall Street, the Chinese are frightened that it might happen again. Since the 2008 crash there’s been a ripple effect that is currently causing many major markets to be at risk like the Euro and the US dollar for instance.

3. Alternative to US Treasuries
As you may be aware, the Chinese government owns nearly a trillion dollars of the US debt. As an alternative to not to just invest in the US alone if its market should crash, gold is considered as a far more safe and stable investment.

4. Increase Reserves to Prepare for Another Collapse
Gold is considered to be a precious metal. The Chinese haven’t been buying just gold, but also silver and other valuable objects. By doing so, China is creating an increase in gold prices as the demand increases and a possible consequence is imbalance in the global financial markets.

But then again, the Chinese are unpredictable. In 2011 gold reached a record high price because they were buying like crazy but towards the end of the year, the gold prices started to fall as the Chinese craved gold less. Fact remains that perhaps in 3 or 4 months the Chinese will start buying gold again and this has serious consequences for certain countries as they may find themselves in the position to sell their short-time gold reserve.

During the first January till October 2011, the Shanghai Gold Exchange trading volume increased with 43 percent. In this period of time, it wasn’t just the Chinese government that was buying gold, but the Chinese citizens as well. The middle class has grown drastically hence the growing popularity of gold.

In 2007 the Chinese households have bought about half as much gold as all the Western investors combined. This proves that China is playing in the big league of superpower economies and may soon be the largest economy in the world surpassing the USA, the currently number 1.

The fact that China has a superpower economy shouldn’t come as a surprise as they are the leading consumer of energy since 2010. The Chinese are also investing so much in scientific research. The own the world fastest supercomputer and the world’s fastest train.

China has done remarkably well despite the fact that they are a communist country. They have progressed at such a fast pace that it’s obvious that they know exactly what they are doing.

What about 2012?
Many of you may be wondering if gold prices will rise again in 2012. The short answer is: “of course!” The American economy is recovering, slowly. Nonetheless people are getting their jobs back and when people work, they have money to do extra stuff. The extra stuff involve buying and when smart people buy nowadays, they invest by buying gold or silver or whatever other precious metals. Others will buy things they don’t urgently need which gets the economy going and when the American economy is going, China’s economy is going (faster).

When the Chinese have a lot of money in circulation, namely high inflation, the Chinese people will undoubtedly buy gold. When the demand becomes high sometime this year, the gold prices will rise.

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