I have been tracking China’s gold reserve for some years. There is no secret that China is buying as much gold as she can since 2008. But there is only so much available in the world for sale, and the amounts that central banks sell are usually announced. So I cannot come out with a 5,000 tonnes figure.
That’s purchase of physical gold, not paper gold. China also built a new gold vault in Hong Kong and requested England to deliver the physical metal under her custody back to HK a few years ago.
China has become the world’s largest miner of gold but the annual production is officially estimated at between 200-300 tonnes only.
So I would believe in a 3-3,500 tonnes estimate. Any more than that would involve extraordinary deals (the only country that would have sold gold to China of any substantial amount may be Russia, but countries like Italy may need to cough up some gold to shore up her finances, and China may have swapped USD into some gold with the IMF but that should have been announced).
The wild card, however, is the private individual and jewellry markets. I just watched a Chinese documentary on the activities in W 47th Street in NYC. Apparently, there’s a lot of gold from 14k up being melted for CBC everyday. The resultant gold “chocolate bars” are sold to zealous individuals.
Chinese can snatch that up for the government? In tonnage terms, I doubt it would amount to much.
What matters in this regard is the notion of Currency Wars, in the broad context beyond the academic treatment of competitive devaluations of currencies to gain trade advantages.
I haven’t read Rickards’ Currency Wars. The term was actually revived in China in 2007 when a Chinese returnee from the US published a book entitled Currency Wars, which became a sensation because it predicted the 2008 financial tsunami by pointing out and analyzing the huge bubble created around mortgage securitization (he used to work on “numbers” at GNMA). Since, he has written another 3 books in the Currency Wars series, tracing the histories of money and currency credits in the West, the East, ancient and contemporary. His name is Soong Hong-bin. I believe he might have inspired Rickards’ book by the same title.
The notion of money and finance underpinning war and peace, and of private individuals controlling central banks and orchestrating booms and busts, has entered the consciousness of many in China, especially the leaders and throughout the CCP. It is something the whole world should pay attention to, as it will play a big role in the present and future scripts of power politics.
China Working Quietly To Buy Up Gold
The Fed’s preferred measures of inflation are so low they’re in the Fed’s panic zone. What gives?
“There’s an ideal playbook, and it would look something like this,” James Rickards, author of the New York Times bestseller Currency Wars,explained. “You’d have higher inflation than we have today, but not super high. It might be in the 3-4% range. GDP of maybe 5%, which is pretty high, and then that would bring down the debt-to-GDP ratio so the United States doesn’t look like Greece.”
The result would be a cheaper dollar, which would help exports and get the inflation the Fed wants. “And you’d have negative real interest rates,” he added, “which is to say inflation would be higher than the nominal rate — so let’s say inflation 3.5% and a nominal rate of maybe 2.5%, you’d have 1% negative rates.”
None of that is happening. There’s no inflation. In fact, the Fed is talking about deflation. Instead of a weaker dollar, we have a stronger one. Interest rates are rising, but without any inflation, we’re getting positive real rates.
Rickards thinks the Fed is way off the mark about the economy’s health. Bernanke thinks the economy is in much better shape than it really is. “You look at the Fed’s forecasts for the last four years, they were wrong every time, and they were wrong by a lot, meaning why should we believe the forecast now? They’re not going to taper.”
After September, Bernanke will be a lame duck. That means his last Board of Governors meeting will be in January. “We can’t be certain of this,” Rickards qualified, “but it seems very unlikely that he’s going to do anything dramatic on his way out the door. If Bernanke actually does taper in September, which I don’t expect, it’s going to be a shock to the markets, and we’re going to see more of a drawdown in gold, a drawdown in stocks.”
From the Fed, we pivoted to gold. The People’s Bank of China last revealed its total gold holdings in April 2009 — 1,054 tonnes — and they could use it as a weapon in the currency wars.
“If you’re China, the last thing you want to do is be transparent about your gold purchases, because it will drive the price up,” says Rickards. He compared China’s strategy to a game of Texas hold ’em. “You want a big pile of chips. The U.S. has a big pile of chips, Europe has a big pile of chips. The U.S. has 8,000 tonnes of gold, 17 members of the euro system have 10,000 tonnes. China at 1,000 tonnes is not a player, but at 5,000 tonnes, they are a player.”
According to his best information, China is there already. To be clear, no one really knows, except for maybe a member of the Communist Party, says Jim. “But I have spoken to a number of sources in Asia,” he says. “I’ve spoken to a number of people who are very close to the physical market, I’ve done my own investigations. Every time I have an estimate and try to verify it, what I get back is that I’m wrong on the low side.”
So he expects that come April 2014, China will announce that it owns 5,000 tonnes of gold.
“That should be an earthquake because even the gold deniers, the gold doubters, are going to have to sit up and take notice. Either the Chinese are dopes, which they’re not, or people will start to get gold, which I think they will.”
If these scenarios played out, gold would go a lot higher. Jim told us it could go up in a very short span of time, say, 90 days or at the most six months.
“The world of $4,000 gold is the world of $400 oil, $100 silver, higher prices for copper, corn, wheat and everything else,” he continued. “In other words, it’s a world of very high inflation in which the value of your retirement funds and your annuities have been wiped out.
In that case, there will be winners and losers. As Mr. Rickards explains, the winners will include those who hold gold. “That’s going to be a very small minority. It’s a small minority today. It might get a little bit larger, but that’s not most of the population.”
The losers will be everyone else. “So,” Jim explains, “you’re going to have this resentment, this political resentment, where the vast majority of the people who just sort of took it on the chin are going to be looking at a small number of people who protected themselves, and they’re going to say that’s not fair. And we’ve seen this before. Congress has a way of dealing with it, which is a windfall profits tax.”
He was quick to add that laws like that don’t happen overnight — there’s a legislative process that bogs it down. “Secondly,” he adds, “you should be able to see it coming and maybe pivot out.”