China Strikes at the Heart of Gold

China's exhaustive efforts to secure supplies of strategic resources from around the globe have just taken a most precious turn. After concluding that China's unquenchable resource blitz collectively constituted one of 2009's most overlooked events, I now submit that the nation's swiftly growing demand for gold comprises a new wave of fundamental support for rising gold prices.

U.S. miner Coeur d'Alene Mines (NYSE: CDE  ) this week unveiled a landmark long-term supply contract with China's leading gold producer: state-owned China National Gold Group Corporation. Roughly one-half of the life-of-mine gold production from Coeur's nearly operational Kensington gold mine in Alaska will be sold under this first-ever foreign supply contract for gold from a Chinese state-owned enterprise (SOE).

Let's get to the heart of the matter
Coeur d'Alene Mines is named after a town in Idaho whose native inhabitants were described -- by French-speaking fur traders -- as possessing hearts as sharp as an awl. By getting a leg up on what I have forecast will become an acute shortage of physical gold supply in the years to come, China exhibits a sharp heart for procuring strategic assets while the Western world appears to be procuring little more than additional debt.

China became the world's leading producer of gold in 2007. Although this new contract covers only about 750,000 ounces (23.3 tonnes), the very fact that the world's leading producer is looking outside its own borders to secure additional gold supplies speaks both to the robust nature of domestic demand, and to expectations for that to continue over time.

Not only is China's central bank expected to continue increasing official gold holdings to hedge against its heavy U.S. dollar exposure, but Chinese citizens continue to increase their consumption of gold both for investment and for adornment. Although India has long been the world capital of gold jewelry demand, recent figures suggest that China may already have surpassed India's hunger for jewelry.

Last year, China's mined supply of 314 tonnes fell more than 100 tonnes short of satisfying domestic investment and jewelry demand. The World Gold Council forecasts, incredibly, that China's overall demand for gold will double over the coming decade.

Indeed, The China Post reports that trade volume on the Shanghai Gold Exchange surged 22.6% last year -- trading $162 billion in gold -- to become the world's largest spot market for gold. Hong Kong commissioned a large new bullion vault, and began repatriating gold that had been stored in London.

Although Eldorado Gold (NYSE: EGO  ) remains rather unique in terms of offering Western investors easy access to Chinese production, Fools analyze China's significant role in the gold market with an eye toward generating an outlook for the broader sector. If Chinese gold demand does double in this decade, then even a broad sector vehicle like the Market Vectors Gold Miners ETF (NYSE: GDX  ) is bound to excel. For maximum returns on gold, however, this Fool continues to recommend smaller-cap producers like those found within the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ  ) . With one-stop access to promising junior producers, featuring Northgate Minerals (AMEX: NXG  ) and Golden Star Resources (AMEX: GSS  ) , this ETF is a highly liquid and attractive vehicle for leveraged exposure to anticipated strength in gold prices.

Gold is a hot topic on the blogs at Motley Fool CAPS. Join the free service today and see just how many Fools are taking the long view when it comes to investing in gold. The "Gold" tag at CAPS lists 52 potential investments, and you'll find Christopher's comments on most of them.

Fool contributor Christopher Barker carries a silver coin that reads: "Honest value never fails." He can be found blogging actively and acting Foolishly in the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Coeur d'Alene Mines, Eldorado Gold, Golden Star Resources, Market Vectors Junior Gold Miners ETF, and Northgate Minerals. The Motley Fool's disclosure policy is 0.999 pure.


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