China Concerns, Crashing Currencies and the Future of Gold Purchases

With the International Monetary Fund, or IMF, poised to sell some of its gold this year, gold bug investors are on edge.

That imminent sale will probably put some pressure on gold this summer, but don't let it depress you; the big picture remains unchanged as it pertains to the next dollar crisis, skyrocketing U.S. debt levels, and the drive to create inflation by deflation-battered and wounded central banks.

In addition to the above reasons, I'm a gold bug because of the obvious accelerated decay of the global exchange rate mechanism. And it's not just a volatile dollar that's the primary actor destabilizing the financial system; many other currencies fluctuate violently from one year to the next, causing disruptions in business activity, financial projections and cash-flow.

Currencies shouldn't devalue or revalue by 20% or more in a short period of time. But that's been the case since the demise of the Bretton-Woods gold standard in the early 1970s. Crashing currencies don't evoke confidence among investors or businesses and ultimately lead to higher inflation and a lower standard of living.

About three weeks ago, China began to publicly express its concerns over exploding U.S. Treasury debt issuance. The Chinese hold about 40% of all outstanding American Treasury debt and, since 2001, have seen their dollar holdings decline vis-à-vis other currencies despite gains in T-bonds over the last decade. Basically, the Chinese appear to be growing frustrated with this quid pro quo arrangement whereby the United States consumes a fifth of her exports while Beijing supports the Treasury market by recycling part of its trade surplus into dollar-denominated Treasury debt.

According to the World Gold Council, China holds 600 tons of gold, or 0.9% of its foreign exchange reserves in physical gold. This compares to more than 8,000 tons for the United States and over 3,000 tons for the International Monetary Fund.

I find it truly hard to believe that with China sitting on almost 40% of all U.S. Treasury issuance and almost $2 trillion dollars of Uncle Sam's paper in her foreign exchange reserve coffers that she's not aggressively buying more gold. I've got to believe some of these numbers are not accurate; is China really reporting its true gold holdings to the World Gold Council? If the Chinese are so shrewd and pragmatic why haven't they amassed more gold over the last several years?

I think it's fair to assume that many government statistics worldwide are not accurately reported.

We already know that governments fabricate the consumer price index (CPI) because this component of price measurement really doesn't depict the real rate of inflation occurring. I think it's the same with China. We can't trust government data in China any more than we can rely on government data elsewhere. If you subscribe to this view - and I certainly do - then I would find it hard to believe the Chinese have been sitting back watching their dollar reserves shrink vis-à-vis gold and other currencies since 2002.

I reckon the Chinese are aggressively accumulating gold as they gasp for air watching the United States print money like crazy to finance fiscal spending, bank bailouts, and two military conflicts overseas. This rate of spending is simply not sustainable, even for a reserve currency.

Gold prices, which currently trade 13.5% off their all-time high of $1,033 an ounce, will recover swiftly before the end of the year and should close north of $1,150 before Christmas.

Though jewelry (fabrication) demand has indeed collapsed since $750 an ounce, especially in India, investors elsewhere are accumulating gold to hedge their paper money portfolios at a time when global government spending is totally out of control. Central banks will not be able to drain all of this incredible liquidity from the financial system once the markets stabilize; history does not bode well for fiat paper and this round will probably witness the worst destruction to our purchasing power since the early 1970s and possibly Weimar Germany in the 1920s.

Comments

[Abe Mishima:]

Gold is as artificial as currency. Unlike paper money, gold is fairly illiquid. Want a demonstration? Put two kilotons up for sale on the open market, and see the price plummet to $500/oz. The author indicated that the retail demand fell when the price went above $750/oz. With extraction costs amounting to $400/oz, what is the impetus for increasing supply? If not for jewelry and electronic plating, what use does gold have? Gold bugs have got to stop being enamored by this shiny asset. In a Great Depression, gold is no more valuable than a loaf of bread. As a hard asset, the utility is less than land (another finite, tangible asset). With value so dependent on "perception", all that glitters is not goog.

Apr 16 01:24 PM

[Eric in IL:]

Gold actually looks to be forming a nice double-top here. I see no reason why we couldn't retrace all the way back to $600 in the next two years. I think we have seen a fundamental shift in leverage and the money printing will not have the near-term inflationary impacts that everyone expects. When Gold doesn't skyrocket to $2000 like everyone expects, and they see that equities have relatively outperformed from here, they will flee gold. That is when I'll buy. Platinum has already retraced to 2004 lows. Gold hasn't. And even if it does maintain a trend, the long-term trendline intercept is near $700.

Apr 16 01:55 PM

[No Eye Deer:]

What is China upto.

A 'Copper Standard' for the world's currency system?
Hard money enthusiasts have long watched for signs that China is switching its foreign reserves from US Treasury bonds into gold bullion. They may have been eyeing the wrong metal.

www.telegraph.co.uk/fi...


China could be using dollars to build up large stock piles of metals.

Apr 16 02:02 PM

[No Eye Deer:]

About China buying gold.

You may be correct.

Does anyone know the figures for Chinesse gold production.

I think China will buy from source. Not from the Market.

Apr 16 02:06 PM

[Glen88:]

You asked : If the Chinese are so shrewd and pragmatic why haven't they amassed more gold over the last several years?


The reason is simple. China did not really invest anything. At least buy the definition of investment. What China did was recycle the balance of payments from its trade surpluses into treasuries in order to keep an artificial exchange rate. The price of being a bad 'investment' went to pay for stimulating its export markets.

If China was to have have behaved as an investor, it would have accumulated a more balanced portfolio. Then again its currency would be worth a lot more, or the US dollar worth a lot less, which in turn would have stymied its growth. WIthout that growth they risked civil unrest.

Apr 16 02:25 PM

[user 385544:]

i found that article eye opening also...a must read.


On Apr 16 02:02 PM No Eye Deer wrote:

>
>
>
> What is China upto.
>
> A 'Copper Standard' for the world's currency system?
> Hard money enthusiasts have long watched for signs that China is
> switching its foreign reserves from US Treasury bonds into gold bullion.
> They may have been eyeing the wrong metal.
>
> www.telegraph.co.uk/fi...
>
>
>
> China could be using dollars to build up large stock piles of metals.
>
>

Apr 16 11:04 PM

[Gone Broke:]

Since when is:

"I think it is fair to assume ..."

a basis for anything?

Apr 17 10:34 AM

[huangthomas:]

IMF does not have gold. The currency unit of IMF is SWR (Special Withdrawal Right) composed of a basket of strong currencies such as dollar, sterling, euro, yen.. Since the recent G20 meeting, the member countries have committed to lend more money to IMF, the central banks of the member countries are forced to sell gold, 500 tons this year, 500 tons more next year, and 500 tons the year after....... The central banks limit annual gold sell to 500 tons to stabilize the price of gold.

Apr 17 11:13 AM

[auto44:]

Abe,Dude, The FACT THAT CURRENCY IS LIQUID DOES NOT STOP IT FROM DEPRECIATING. The concern here is with the loss of buying power particularly in these times of high speed presses whirring in every capitol in the world. This is China's concern and this is my personal concern. Where do we invest our money so that we can avoid this supply and demand crisis caused by inflationary practice of excess money. Shares of (gld) are just as liquid as money and rise and fall with gold prices.


On Apr 16 01:24 PM Abe Mishima wrote:

> Gold is as artificial as currency. Unlike paper money, gold is fairly
> illiquid. Want a demonstration? Put two kilotons up for sale on the
> open market, and see the price plummet to $500/oz. The author indicated
> that the retail demand fell when the price went above $750/oz. With
> extraction costs amounting to $400/oz, what is the impetus for increasing
> supply? If not for jewelry and electronic plating, what use does
> gold have? Gold bugs have got to stop being enamored by this shiny
> asset. In a Great Depression, gold is no more valuable than a loaf
> of bread. As a hard asset, the utility is less than land (another
> finite, tangible asset). With value so dependent on "perception",
> all that glitters is not goog.

Apr 17 11:35 AM

[auto44:]

Gold bullion varing doesn't give them any more cash unless they sell the bullion,it's value is just a bookkeeping entry,I would think.


On Apr 16 05:04 PM Freya wrote:

> Does anyone really know how much Gold the IMF has? I've been doing
> some reading into its history and have yet to find how much Gold
> it had before the US left the Gold Standard in 1971.
>
> As far as I can tell, it never revalued the $35/oz. gold it held
> ( it has never been "marked to market").
>
> One would think the amount of cash it had to distribute would have
> varied year to year with Gold bullion's appreciation over the last
> 8 years, but it hasn't.
>
> If it had $250 Billion worth of Gold in 2002, wouldn't it be around
> $875 Billion currently?
>
> What am I missing? Are there stats available on tonnage held year
> by year?
>
>
>

Apr 17 11:39 AM

[yellowhoard:]

If the IMF decided to back its SDR's with a basket of commodities, wouldn't it be in their best interest to see a huge increase in metals pricing right before they made such a move?

Apr 19 01:35 PM

[bricki:]

The Chinese may not own a lot of gold, but they have been making a lot of deals in commodities and raw materials that they will need to fuel their economy in the future.

They clearly do not have any faith in the dollar and are definitely working to make some smart investments in physical assets.

Given currently depressed prices in these assets and the growth rate of the Chinese economy going forward this may actually turn out to be the right play for them.

Going forward I would not be surprised for the Chinese to begin accumulating various precious metals as well.

Apr 19 02:23 PM

[Clint007:]

Some people (Apr 16 01:24 PM Abe Mishima wrote:...) don't know nothing AT ALL about the use of the Gold.All the money in the world have been born because of the Gold, it is THE ONLY REAL MONEY.
Did you know how the "boat people" escape? Their money has no value they had to pay with Gold, yes, that was the only money accepted. Anywhere in the world the Gold will be accepted.
About China, do you know with witch money they will by Gold? Yes, with the US$ (they made a lot of US$ with export in US also with their depts they own).
They are buying, Mines, Oil & Gas...) around the globe right now with, again, US$, in a hurray before the US$ get devaluated (around 10%).
Did you know the relics are more valuable then the US$?
:)

Apr 19 07:47 PM

[Clint007:]

This is a MUST read by Richard Russell (he follow the market/Gold since 1958)
They might be looking to buy the 100Billion$ of Gold from IMF (All their holding)!!
Also look how many tonnes of Gold B of Canada hold.

www.321gold.com/editor...

Apr 19 08:17 PM

[one eye:]

China is rumored to be producing about 1,200 tons of gold annually. If it keeps everything In House and adds scrap from its citizens, They could triple their holdings within a few years without entering the open market.

Buy Low.

May 06 01:42 AM

[Freya:]

Yellowhoard: the Asian Block received assurances that they would have a say on the IMF's conditions attached to loans. Let's say a Commodity based SDR were created, would the IMF have to back it with the commodities themselves?

Mexico was given a $48 Billion line of credit by the IMF over the weekend. Thought you'd like to know.

Apr 20 12:52 PM

[Freya:]

Why would China pay Up for a commodity it knows it can purchase cheaper later.

What sort of damage would another drop of $50 to $150 in Gold do to the GLD ETF?

Apr 19 11:45 PM

[Freya:]

Richard Russell has been known Not to follow DOW theory to the letter. That's why so many other DOW theory newsletters are available.

Gold is not his forte. Anything he would have to say would just jumble the ongoing uncertainty.

"Another country heard from"

Apr 19 11:38 PM

[Freya:]

Huang: I hate to be the one to tell you this. The IMF has more Gold than the USA, 103 million oz as of 03/2009. They have provided cash to Miners based on contracts for future delivery of Gold that they produce. Their Holdings in the form of SDRs are only about $3 Billion.

Auto44: The "Bookkeeping" entry would reflect "loan" availability would it not? Apparently, they hold: Currencies of the member countries, SDRs (which are the least), Gold (103+ million oz), other loan collateral such as Land and Buildings.

At 103.4 million oz., they have more Gold than any nation. IMF data as of March 2009. (IMF Website)

Apr 19 01:09 PM

[Freya:]

Does anyone really know how much Gold the IMF has? I've been doing some reading into its history and have yet to find how much Gold it had before the US left the Gold Standard in 1971.

As far as I can tell, it never revalued the $35/oz. gold it held ( it has never been "marked to market").

One would think the amount of cash it had to distribute would have varied year to year with Gold bullion's appreciation over the last 8 years, but it hasn't.

If it had $250 Billion worth of Gold in 2002, wouldn't it be around $875 Billion currently?

What am I missing? Are there stats available on tonnage held year by year?

Apr 16 05:04 PM