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China Decision to Buy $80 Billion of Gold, the Dragon's Hoard
"We've got a situation where Geithner is smiling and has no choice but to stress the credibility and stability of the US financial and economic system, while the creditors [such as the Chinese] smile back and say they believe him, while at the same time giving hand signals to their reserve managers to get rid of these things [U.S. Treasuries]." - Neil Mellor, Bank of New York-Mellon
When China recently expressed its interest in purchasing $80 billion in gold (about 2600 tonnes), it profoundly altered the gold market's long-standing synergy in three significant ways:
First, it used to be that the threat of central bank gold sales would damage market sentiment. Now the threat of significant sales has been met with the threat of significant purchases.
Though the dragon hoard depicted by our good friend, Ed Stein is not yet a reality, China can back its desire to own gold with plenty of cold hard cash. At nearly $1.4 trillion in dollar-based assets, and almost $2 trillion in total reserves, $80 billion would consume a paltry 6% of China's dollar reserves. At the same time 2600 tonnes translates to roughly one-third the U.S. gold reserve -- a significant ambition by any measure. To give you an inkling of how this new synergy might work, when the International Monetary Fund announced recently it would like to sell about 400 tonnes of gold, China joined India in publicly pressing the IMF to sell its entire 3200 tonne hoard. On that news the gold market, which had been in a slow slide as a result of the IMF's announcement, turned and took another run at the $1000 mark.
Second, by becoming gold's most prominent champion, China mounts an aggressive defense of its domestic gold mining industry, and by proxy the rest of the industry as well.
Few people know that over the last few years China has quietly become the world's leading gold producer. Most of that production never leaves China's borders, but goes instead to the national reserves as a hedge against its currency holdings. China, by the simple expedient of defending its own interest, accomplishes much for the gold mining industry as a whole. By posing as a gold buyer of last resort, ready, willing and able to scoop up any sizable offer, China may have very well put a floor under the market price, though we are too early in the game at this juncture to predict what that price might be. There is no question, however, that China has put a floor under long term gold market expectations. One would have to go back to the first Central Bank Gold Agreement in 1999, which strictly limited the sale and leasing of central bank gold, to find an equivalent organized effort in defence of the long term price trend. Many feel that the original CBGA launched the current bull market in gold, and time will tell whether or not China's bold entry onto the gold scene will launch its second leg.
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Third, by elevating gold to prominence in its national reserves, China lays the groundwork for the yuan's future use as a prominent reserve currency.
There is little doubt that China would like to make the yuan the currency of choice in the East and a strong measure of gold in its reserves would do much to enhance that possibility. For a comparative history, one would have to go all the way back to the late 1960s and the time of French president Charles DeGaulle. "The Last Great Frenchman" thought it best to hedge the national interest and elevate its future economic prospects by purchasing gold. A substantial amount of metal subsequently left U.S. coffers for European national balance sheets including that of France. DeGaulle was later vindicated when gold rose twenty five times in dollar terms over a short ten year period from $35 an ounce to $875 (1971 to 1980). Some of that same gold would later play a key role in the establishment of the European Union, the European Central Bank and the euro, Europe's currency. China, by its recent actions, appears to have similar intentions both in terms of gold and the yuan.
had better watch exactly where the physical gold really is because There is some disturbing evidence that such "paper-gold" doesn't exist in real form after all, even in some of the most allegedly stable institutions. You might be safer wrapping physical ingots in wax paper and burying them in your back yard.
One possibility is that an honest mistake was made. The high demand recently has apparently kept the depository workers very busy. Wall Street veterans recall that delivery errors were chronic in the days of paper share certificates. Another possibility is that the bar indicated on the warehouse receipt does not actually exist. The implications of that are rather dire.
At the same time 2600 tonnes translates to roughly one-third the U.S. gold reserve.
the price of gold is set on the London market by the five members of the London Gold Pool. It is designed to fix a price for settling contracts between members of the London bullion market, but informally the Gold Fixing provides a recognized rate that is used as a benchmark for pricing the majority of gold products and derivatives throughout the world's markets. The Gold Fixing is conducted twice a day by telephone, at 10:30 GMT and 15:00 GMT.
Not A Fixed Price
The other common error is for people to think the gold fix price is a fixed price, as in today's price or this morning's price, and that all gold transactions for the whole morning, afternoon or day, are carried out at the fixing price. This is not true. The fix price is the price at the exact instant in time at which it is agreed. Within seconds it will be trading at different prices. Amateurs, and also many who should know better, may then wonder what is the point, and why it is called a fixing price. The simple answer is that the five members use it to establish a market price which is fixed only for that precise moment, at which they can balance their sales and purchase requirements, including orders and commissions from clients. We ourselves often use the London gold fixing as a basis for our transactions with other professionals. We are also happy to do this with private individuals, but we find most people are happier for us to quote them a current "spot" price for gold.
Originally posted by ANNED
In the 1970s the arabs demanded gold for there oil when gold was around $700 per ounce.
Two years later the gold pool had dropped the gold price to under $250 a ounce and really screwed the arab oil princes..
The Arabs have never demanded gold for oil since.
[edit on 27-6-2009 by ANNED]
Originally posted by cloudbreak
There has been no word from the Chinese at any level, certainly not officially, about buying such an amount. To do so would be shooting themselves in the foot; both in terms of a reduced USD value of their reserve holdings, and an increased gold price; this, remember, is before they even make such a purchase.
Originally posted by venividivici
reply to post by silent thunder
You better read your source article again because you only cited one explanation.
Fear-mongering will get you nowhere sonny