|
Why is China Buying Gold? |
Pittsburgh,
Pennsylvania
Friday, May 29, 2009
* Markets bounce back and China ramps up commodity inhalation,
* Could the U.S. dollar become the world’s next “barbarous relic?”
* A graphic display of the greenback’s value collapse, gold rockets
ahead of Byron’s Miserable Rich Gold Report (5pm today) and plenty
more...
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Eric Fry,
reporting from Laguna Beach, California…
Hey Rude readers, can you see the chart below? The Chinese can see it
to…and that may be a big part of the reason why the gold price keeps
marching steadily higher.
The Chinese can see that U.S. dollars – like all the rest of the world’s
paper currencies – tend to lose value over time…lots of value. The
Chinese can also see that the current crop of American leaders is
implementing policies that will likely accelerate the dollar’s decline.
American politicians, Federal Reserve appointees and Treasury officials
are united in their efforts to counteract the forces of recession. Their
weapon of choice: dollar debasement. From behind the ramparts of New Era
acronyms like “TARP” and New Era euphemisms like “quantitative easing,”
the Fed and its comrades-in-arms hurl trillions of dollars of currency
and credit toward the enemy…hoping to scare it into retreat.
So far, the enemy seems unfazed. Recession continues to advance, even
though the battlefield is littered with Private “Benjamins.” Therein
lies the problem for the U.S. economy. Even if the Fed manages to repel
the forces of recession for a while, the cost to our beloved dollar
could be incalculable. In other words, we might win this particular
battle, but we are likely to lose the war. The more dollars the Fed
catapults into the banking system, the greater the risk that
hyper-inflation will ensue.
Several high-ranking Chinese officials fear such an outcome…and they are
not afraid to say so. In mid-February, Zhou Xiaochuan, the Governor of
China’s central bank wondered aloud, “Is it time for China to consider
using its reserves somewhere else, instead of concentrating too much on
the United States?”
One month later, Premier Wen Jiabao remarked, “I am a little bit
worried. I request the US to maintain its good credit, to honor its
promise and to guarantee the safety of China’s assets.” A few days prior
to this statement, Luo Ping of China’s Banking Regulatory Commission
offered a less delicate version of the premier’s remark: “Once you start
issuing $1 to $2 trillion [of Treasury bonds], we know that the dollar
is going to depreciate. So we hate you guys, but there is nothing much
we can do.”
Nothing much, perhaps…but something, nevertheless. The Chinese can
diversify a portion of their reserves into gold. And that’s exactly what
they appear to be doing. Even a modest re-allocation to gold could
produce a meaningful rise in the gold price…and that’s without including
growing demand from the rest of the world’s dollar-phobes.
In today’s edition of the Rude Awakening, Byron King, our resident
expert on gold and other commodities, explains why the Chinese might
accelerate their gold purchase over the coming months.
--- Energy &
Scarcity Investor: Offer Ends ---
Good
Times Make Money…But RECE$$IONS Make FORTUNES
Right now I'm seeking a few brave souls with the "stones" to become…
"Miserable
Rich!"
Do what I'm about to show you — before Friday, May 29 — and you
could make so much money, you'll demand I apologize for "spoiling" you
with so much success.
Impossible? Don’t take my word for it.
Read on here…
---------------------------------------------
Why is China
Buying Gold?
By Byron King
Remember the old expression, "I wouldn't do that for all the tea in
China." People used to associate China with tea. Well, now it's time to
associate China with gold, and a lot of it. Because the Chinese recently
announced that they control over 33.89 million ounces of gold for
monetary purposes. That's an increase of 75% in Chinese gold holdings
over the past six years.
This kiloton of Chinese gold makes the Middle Kingdom the world's sixth
largest holder of the yellow metal. The U.S. -- courtesy of President
Roosevelt's gold confiscation in 1933 – tops this list of the world’s
largest gold holders, followed by Germany, the IMF, France and Italy.
How did the Chinese accumulate so much gold? China purchased it over the
past six years through its State Administration of Foreign Exchange
(SAFE). SAFE is quite distinct from the People's Bank of China (PBOC).
The SAFE purchases meant that the gold did not appear as part of China's
officially reported monetary reserve figures.
The Chinese gold purchases, evidently, were part of a slow and steady
buying program between 2003 and the present. It makes you wonder what
the Chinese were thinking back in 2003. I happen to know, courtesy of an
acquaintance at the Naval War College, that the Chinese were quietly
forecasting that the U.S. would destroy its dollar by going to war in
Iraq.
At any rate, SAFE bought all of the gold from domestic Chinese
suppliers, so the overall impact was minimal on the international gold
markets. Now the Chinese gold holdings have been transferred from the
SAFE books to the PBOC. Hence, the official announcement. And here's
what REALLY matters. China is monetizing its gold!
This SAFE-to-PBOC transfer marks a profound decision by Chinese
government leaders. Obviously, the Chinese government has bought gold
over the past six years. But the Chinese have been engaged in an
internal debate over whether to add the gold holdings to the official
Chinese monetary reserves. That is, if the gold was not "monetary," then
it was just another non-monetary investment commodity like iron ore or
copper or petroleum.
But now, with the announcement by the Chinese Central Bank, it appears
that the debate is resolved. The gold has been added to Chinese monetary
reserves. This action by China is part and parcel of an under-the-radar
global effort to rehabilitate gold as a monetary reserve asset.
Gold has not been a factor in global trade and currency exchange since
the late 1960s. But there's a powerful movement afoot in the world to
reestablish gold as part of an international monetary system. It's
because the U.S. dollar has been so badly mismanaged over the decades.
No, you won't read about it in your local newspaper, or even in the
standard, mainstream business media. But that movement is out there.
It's happening.
At the same time, for many decades, the U.S. establishment has pooh-
poohed the "gold effort." U.S. policymakers, politicians, bankers and
academics were collectively smug in their empirical certainty that, as
Lord Keynes once noted, "Gold is a barbarous relic." Apparently, the
Chinese don't agree. Not anymore. Indeed, the Chinese may well be
thinking that the U.S. dollar is the real "barbarous relic."
So now the Chinese are primed to begin using gold as a monetary asset.
What's the practical impact? I expect to see central banks worldwide
start to add gold to their monetary reserves. The floodgates are
opening. The PBOC and other central banks from here to Timbuktu are
going to become net purchasers of gold in the years ahead. And people
who own physical gold, as well as shares in well- managed mining
companies, will benefit greatly.
One important commentator on gold prices is Peter Munk, founder of
Barrick Gold, the world's largest gold-producing firm. Recently from
Switzerland, Munk remarked, "I have to think [gold prices] are going to
be significantly higher than last year, just like last year was higher
than the year before."
According to Munk, the recent injection by the Federal Reserve of new
currency into the money supply is an "enormous, enormous inflationary
factor" for the dollar. This will make gold and silver "more and more
desirable." In addition, "Gold has got a very strong and stable support
right now as long as we have this enormous uncertainty out there. And I
think this uncertainty will probably last for a while, because I don't
see any major catalyst that can turn this around."
Finally, Munk said, "Every year in the last three years, as the world
becomes less and less secure in terms of normal investments and people
lose faith and confidence in bonds, stocks, secured debt instruments,
people turn to gold. It automatically attracts people in direct
proportion to their fear, and that is fear of losing their money."
Founded by Munk in 1983, Barrick Gold is among the world's largest gold
miners. Barrick has pursued growth through judicious expansion and a
continuing process of acquisitions. "Barrick has grown," said Munk,
"primarily through an aggressive acquisition program in the last 25
years. So of course, we'd be on the lookout all the time for strategic
acquisitions or mergers…The major gold deposits throughout the world in
the main have already been found, so it's getting more and more
difficult, and that's why you see global gold production heading
downward, despite higher prices and increased spending on production."
The bottom line in all of this is that you should be sure to pad your
portfolio with gold and silver, both the physical metals and shares in
quality mining companies. America’s political leaders have promised to
fight recession by debasing the dollar. That may be the one and only
political promise you can ever really trust.
Joel’s Note:
Byron’s “miserably rich” Gold Report is out at 5pm this afternoon
(Friday, 29). To ensure you are on the mailing list,
click right
here.
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[Rude Endnote:
Many of the world’s markets marched in step with the U.S. overnight
after the Dow climbed over 100 points in yesterday’s session. Whether
Wall Street leads them to the land of milk and honey or off the side of
a cliff remains to be seen. We’d suggest an emergency parachute, just in
case.
Here in Asia, Japan’s Nikkei 225 rose by 1.75% while China’s CSI 300 and
Hong Kong’s Hang Seng finished 1.5% and 1.6% respectively. The Aussie
All Ordinaries capped off a decent week, also closing out Friday’s
session up 1.6%.
European markets too were headed higher last we checked. London’s FTSE,
France’s CAC and Germany’s DAX were all up around 1.5% just a few
moments ago.
Over in the commodity pits, it’s starting to look like 2007 all over
again. Crude jumped to over $66 per barrel overnight while gold leapt
$14 per ounce to $977.
Wait. Did we mention Byron’s “Miserable Rich” Gold Report above? Did we
mention it will be out at 5pm today and that you can
sign up for it here? We did? Okay then, we won’t harp on it any
longer.
Catch you tomorrow.
Until then...
Cheers,
Joel Bowman
The Rude Awakening
aussiejoel@the-rude-awakening.com |
