China hikes Rates - Leaves savers at the mercy of inflation

Big news overnight is the hike in interest rates by the People's Bank of China.

If you want to know the reason behind the phenomenal Chinese gold demand, look no further than this:

Here is the full story from Bloomberg's web site:

http://www.bloomberg.com/news/2011-02-08/-heavy-lifting-to-come-as-china-leaves-deposit-rate-below-inflation-pace.html

Note in particular that they raised one year lending rates to 6.06% while hiking deposit rates to 3%. The official rate of inflation is calculated to be somewhere just below 5%. In other words, savers are losing money when measured in real terms.

Gold ALWAYS thrives in negative real term interest rate environments. Why is that? Because savers come to understand that in order to keep up with the rate of inflation, they require an investment vehicle that is moving higher at least at the same rate as inflation. That is where gold's historic role as an inflation hedge comes into play.

One of the problems that seems to afflict many gold "pundits" located here in the West is that they continue to view gold through the prism of the Western economies. Maybe in times past this was understandable but with the emergence of China and other rising economic powerhouses, such a narrow US-centric or Western-centric view is outdated and yields faulty conclusions as to the yellow metal's fortunes.

As long as inflation is a major concern in the East, gold is going to continue to attract buying from that corner of the globe.