China Decision to Buy $80 Billion of Gold, the Dragon's Hoard

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While the world weeps over the death of Michael Jackson, China is quietly moving to corner the gold market. And those of you with "paper gold" (i.e., certs of deposit, ETFs, etc.) 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.

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.

More at source:
www.marketoracle.co.uk...

[edit on 6/27/09 by silent thunder]

Great find, and one that brings specific doubt in my mind regarding the US Dollar and its decling value.

The past two weeks, I have been purchasing silver bullion and loose silver coins. Although when SHTF, my little $2,000 in silver is not going to save my life ... but at least it will keep me afloat for a few more days.

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

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.

[edit on 27-6-2009 by venividivici]

SPDR Gold Trust has bought and stored 33 billion dollars worth of gold.

I don't think china buying 90 billion is all that significant.

At the same time 2600 tonnes translates to roughly one-third the U.S. gold reserve.

This amounts to one tenth of one percent of the unmined gold reserve that could be mined in the US.

And gold prices are controlled by the "gold pool"

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.
en.wikipedia.org...

China can buy all the gold they want but the Gold Pool can make or break them any time.
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]

The daily London Fix is not a price set arbitrarily by the 5 LBMA member bullion banks , rather it is the mechanism for establishing a common transaction price between physical Gold buyers & sellers. Buyers and sellers submit daily limit orders , and the 'Fix' simply establishes the price at which the gross amount of gold on buy orders matches the gross amount of gold on sell orders , i.e. supply/demand equilibrium.

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.

Text

2600 tonnes is roughly 270 tonnes above current , annual , global Gold production (2330 tonnes mined in 2008). IOW , no small potatos.

GL

Well lets see that puts them in like 5th place up from 7th in March


World official gold holding (March 2009)

Gold (tonnes)
1. Eurozone
11,065.0 tonnes

2. United States
8,133.5 tonnes

3. Germany
3,412.6 tonnes

4. International Monetary Fund
3,217.3 tonnes

5. France
2,487.1 tonnes

6. Italy
2,451.8 tonnes

7. China
1,054.0 tonnes

8. Switzerland
1,040.1 tonnes

9. Japan
765.2 tonnes


Ever see those Cash for Gold Commercials?





[edit on 27-6-2009 by SLAYER69]

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]

Hi ANNED. Interesting...can you elaborate ? For example , when exactly did Arab OPEC members receive Gold for oil , and from whom?

Until Nixon closed the Gold window in 1971 , all foreign held dollars were convertible in Gold as settlement for international trade. After 1971 , foreign sovereigns (oil-rich countries seeking to preserve the value of their investments included) , were required to go into the "open market" to exchange their excess dollar reserves for Gold. The increased demand from this [global] inflation trade , and two official US dollar devaluations (71/73) , helped drive Gold from $35oz in 1971 , to $850 in 1980. Gold didn't trade at $700 until Jan 1980...and didn't drop to the $250 range until 1999 (see Gordon Brown )

In my opinion , ultimately it was the strict monetary policies imposed by central banks that broke the back of inflation (US 13.5% - 1980) , and ended the 71-80 Gold bull.....not , I believe , the "pool" of 5 bullion banks down at the LBMA.

GL

I like this one. Now if it was Gordon Brown proposing this sale , I might even believe it

US To Trade Gold Reserves For Cash Through CASH4Gold.com

GL

This supposed intended purchase of $80 billion of gold by the Chinese is nothing but speculation, heresay - and Chinese whispers at its worst, unfortunately.

$80 billion of gold is a huge amount in the relatively small market of gold, and would make prices soar. Now, the last thing any sovereign nation does when looking to buy gold is to announce it beforehand, and therefore ensure the market prices-in the buy beforehand, and then that nation will have to purchase at significantly far higher prices.

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.

The $80 billion figure was an off-the-cuff remark by a US politician who really wouldn't have much insight or connections in China. He made it in some tv interview, I guess to appear like he knew something when in fact he doesn't. In reality I think it was more a casual remark of what they could do.

The Chinese will keep buying gold, however, but in stealth - and much of that will come from domestic production given they are now the world's top gold producer.

Only when things get really, really, hugely bad on a global financial scale would China purchase huge amounts on the open market.

That said, I agree with the OP's cartoon; only a fool does not hold physical gold or silver given the quagmire the world is galloping headlong into.

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.

Hi cloudbreak. I agree that the bulk of any Chinese accumulation will most likely continue off-market , via the aquisition of internal production. However , despite "shooting themselves in the foot" with respect to the value of Chinese $USD reserves , we continue to read 'official sector' , dollar negative press.....

China Reiterates Call for New World Reserve Currency

Whether ultimately successful , or not , clearly , an open challenge to $USD reserve status has begun in earnest. Additionally , the recent roll into short-term treasuries offers Bejing a little more leverage here. Lets watch capital flows across the next Q.

GL


China should buy gold to hedge dlr fall-researcher

China Should Buy Gold for Reserves, Association Says

reply to post by OBE1


Hi Obe1 - Yes I do not dispute the move underway by China to diversify away from the dollar, and for it to question the status of the USD as a reserve currency.

This has been going on for a while, and is more to do with China seeking stability; an imperative given China deals with exports/imports globally. The USD has been particularly unstable in recent times, and given the RMB is more or less pegged to the dollar, the volatility hurts business and trade, and therefore China. China wants a low USD/low Yuan; the reason why China has suppressed the value of the Yuan for so many years. A high dollar/yuan hurts China, therefore it is being forced to make waves about the dollar's status.

My post was more to do with the bogus/hoax headline of this thread (no offence OP), because there has been no decision by China to buy $80 billion worth of gold. If there was, spot gold would have almost doubled last week. And because the author of the article based his missives around a hoax call that has no validity, the main article is really here nor there...it doesn't add anything new to the fold which isn't already known in the gold/foreign currency markets.

reply to post by cloudbreak

Hi cloudbreak. When Uncle Buck was threatening to break 72 in June 08 , China moved big-time into treasuries (specifically , July through Nov) , helping support a 6mo rally back to 88. To me this indicates a real concern over loss of reserve value , not to mention that dollar weakness increases costs for US importers/consumers of Chinese goods. In the midst of an economic roll-over , Beijing isn't in a position to handle additional pressure on their dollar denominated exports....still the backbone.

I fail to see how a steep decline in $USD would serve China' best interest......currently. However I'm reminded of a familiar St Augustine quote....

Dear Lord, give me chastity and self-restraint ....but not yet!

Regarding the opening post , the premise does does seem a bit loose. While I really can't speak to the credibility of Rep Mark Kirk' Gold declaration , or to that of his supposed Chinese sources , by all accounts , anxiety over QE , and moves towards diversification appear to be a reality.

Since the Chinese have indicated they are gradually sopping-up off-market mine production , an official announcement of intentions to add $80BB Gold would impact the market , but not overwhelmingly imo.

I'd like you to know that really appreciate your Gold savy and well expressed opinions cloudbreak

GL

reply to post by OBE1


Hi Obe1 - Yes a steep decline in USD is not neccessarily in China's interests, because that implies instability/volatility. It is very hard to conduct trade with currency volatility as orders will be held off, be conditional - simply it causes too many headaches and impedes global trade. What China does want is stability (as do almost all countries) in currency markets. Part of China's move into treasuries was to shore up the dollar, help the US avoid recession and attempt to add its helping hand towards some form of stability.

Of course, this can be a double-edged sword. A high USD is not wanted by China on one hand (given the yuan is pegged, or at least trades within a very narrow band, to the dollar) because it makes its exports less attractive to the rest of the world.

So, the best outcome (for China at least), if it could be done, would be for a relatively low, but stable USD - which would then make Chinese exports more attractive to the rest of the world. (I'll get to the other side of the coin in a minute).

Added to this desire for stability is, however, another reason why China would not, and has not, announced the purchase of $80 billion in gold. Even announcing it to Mark Kirk (which is a bit far-fetched and not even worthy of inclusion in a b-grade novel ) would be counter-productive to China's interests, as it provides forewarning and therefore forearming in the currency and gold markets, which is not how things are done if a party wants to get best value.

Anyway - so yeah, a lower USD - let alone the whole QE school of thought - on the other hand, is not so good for China's USD reserves. So, what I see as happening (and is currently happening) is as the USD begins to lose value, China will continue to divest itself of its USD holdings; in resource companies globally, farmland, infrastructure projects globally, aid etc.

Part of this will also go to gold, but you won't know how much or when. The good thing though, about the surmising of China obtaining much of its own gold production, is it seems to be placing a floor on spot gold for now, given China is the world's biggest gold producer.

This price level could well be a bottom, and with the by-product of QE typically being inflation, hyper-inflation or at the least a loss in purchasing power of the dollar, gold is still an excellent buy at these prices in my opinion

Don't forget world gold production is approx. around 2500 tonnes p.a., so if China were to suddenly try to corner this amount of physical (or, the $80 billion worth as per the original post), it would cause panic, worldwide shortage and a resultant surge in prices.

(This is not intended to be investment advice and I would suggest alot of research to anyone before buying gold. But, for me anyway, gold helps me sleep better at night ).


edit: Sorry about the long post, I didn't realize how long it was till posted. A bit boring for most people.

[edit on 29-6-2009 by cloudbreak]

[edit on 29-6-2009 by cloudbreak]

reply to post by cloudbreak

Good post cb , not boring in the least. I'd say were pretty much in accord. Yeah , lots o buzz about a 930 - 940 floor courtesy of China....and I'm sure the not-for-profit Gold faction will try their very best to alter that perception

Sinclair just offered some interesting commentary on the topic of Chinese diversification. Coincidentally , he arrived in Beijing yesterday to pursue further negotiations regarding his Tanzanian mining licenses. Second business trip in the past year or so...JS displays an keen understanding of , and respectful sensitivity to Chinese business culture.


GL

See: An Update From China & More MOPEing Around

reply to post by OBE1


Yeah I read Jim Sinclair from time to time, and just read his latest commentary. I do agree he tends to have better acumen than the mainstream commentators when it comes to China and how things will play out, but even he does from time to time publish 'news' which morphed from mere rumours about someone who made a comment once about gold/China etc.

Interesting to see his stand that there is just 129 days left for the dollar! This will be interesting. If nothing else, Sinclair is a man who calls a spade a spade, sticks to his guns and does appear to be doing alot of unpaid work for the greater good.

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

If the first paragraph of the quoted portion in the original post alone (the Bank of New York-Mellon guy) doesn't scare the living daylights out of you, given where its coming from, you must be beyond fear itself.



[edit on 6/30/09 by silent thunder]