Is China Preparing to Buy Gold? 48 comments
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When I put my orders in for gold and base metal mining shares yesterday, I hadn’t seen this Reuters report that a senior Chinese researcher had recommended buying gold instead of dollars for China’s reserves:
China should buy more gold because the U.S. dollar is poised for a fall and the metal is needed to support the greater international role envisaged for the yuan, a senior researcher with the ruling Communist Party said on Thursday.
Li Lianzhong, who heads the economic department of the Party’s policy research office, said China should use more of its $1.95 trillion in foreign exchange reserves to buy energy and natural resource assets.
Speaking at a foreign exchange and gold forum, Li also said that buying land in the United States was a better option for China than buying U.S. Treasury securities.
“Should we buy gold or U.S. Treasuries?” Li asked. “The U.S. is printing dollars on a massive scale, and in view of that trend, according to the laws of economics, there is no doubt that the dollar will fall. So gold should be a better choice.”
There is no suggestion that Li, even though he is a senior researcher, was enunciating an agreed party line.
However, a debate is swirling in China about how the country can reduce its exposure to the dollar and to U.S. assets in case America’s ultra-loose fiscal and monetary policy rekindles inflation and erodes the value of the dollar and U.S. Treasuries.
To that end, China has said it will buy up to $50 billion worth of bonds denominated in Special Drawing Rights, the International Monetary Fund’s unit of account, to be issued by the IMF.
Chinese companies, at Beijing’s bidding, are also snapping up energy and commodity supplies around the globe to fuel its fast-growing growing economy.
China disclosed on April 24 that it had increased its holdings of gold to 1,054 tons from 600 tons since 2003.
The Obama administration is likely to create a glut in the supply of dollars. As the economy comes down from the sugar high of federal spending, Obama’s impulse will be to spend more money. If he can’t produce an economic recovery during his first term, he probably will get only one term. He’s like a trader with a one-sided incentive, betting his career prospects with other people’s money. At the same time, Obama will reduce demand for dollars: by disrupting the rule of law in capital markets (through the rigged auto industry bailouts, tampering with mortgage collateral and so forth), Obama has eliminated a great deal of the incentive for foreigners to come to American capital markets, rather than, say, China’s.
As I’ve observed on numerous occasions, that portends big trouble for the dollar. But the trouble is not likely to emerge suddenly. The world has no alternative to the dollar for the time being, as my friend Prof. Reuven Brenner of McGill University points out, and America is lucky that this is the case. Robert Mundell, the world’s greatest international economist, argues that countries should use a basket of major currencies (dollar-euro-yen) and monitor the gold price as an indicator of prospective future inflation. Whether such a system ever might come into existence is hard to answer, but it is easy to state with certainty that it won’t happen soon.
Deflation is a stronger wind than most observers think, for demographic reasons: the aging world population wants to defer consumption in order to buy securities , that is, trade present goods for future goods. Like Japan in the 1990s, that is deflationary.
Nonetheless, one can’t keep swinging a sledge-hammer at the pilings of the American economy without consequences. The danger that the world may dive into alternatives to the dollar — hard assets of all sorts — is substantial, even if it isn’t immediate. (Then again, if Israel bombs Iran’s nuclear facilities and Iran closes the Straits of Hormuz, we could reach the long-term a lot quicker than we might have thought).
In the short term, China is going to do everything it can to keep the dollar strong. The last thing China wants is 1) to devalue its foreign exchange reserves and 2) to increase the cost of its goods in dollar terms. Its exports to the US are weak enough as matters stand. But China is going around the world bidding for whatever mining and energy assets it can buy, and is not dickering too much about price.
That is why I am seguing out of credit into hard assets (mainly shares of blue-chip mining and energy companies) on market dips. We are caught in powerful crosswinds and it is beyond my powers to guess which way we might tumble. Americans are likely to be a lot poorer over the next decade thanks to Obama, and it is time to start building up hedges now.
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On Jun 26 03:49 PM AuGod! wrote:
> It is difficult to stay on message here due to some peripheral issues
> raised by some posters.
My apologies.
I've been hearing anecdotal reports of (rather brash) cash offers being made by foreign purchasers on foreclosed / distressed residential properties locally, (central California), that have caused some local buyers requiring convential lending problems in competing. The upside anyway is that it could help slow the further slide in values.
I say to Roger, why Seabridge? When Jaguar upped its production by over 50% during the last and first quarter of this year, and expects to ramp up yet another whopping 600% by 2014. There is simply no other junior gold miner out there expanding production as fast as Jaguar Mining.
Spend a few minutes and go to their corporate website and read their financials and quarterly report. Long term, there are not a whole lot of better investments out there.
Everyone needs to learn that money is a store of human labor. That means that those who create money get rich off of those who labor to pay off debts, because money in the current system is created out of debt. Therefore, it is easy to conclude that those who have been given the power to create money will want to keep alive a system that has served them so well for so long. Debt is slavery, and only a return to gold and silver can set the world free from the bondage of fiat money.
This does not mean they would not be bigger investors in gold if the system were not so transparent, it only suggests that they are hedging to some extent and spreading the risks around. Gold is just one single component in that risk reduction strategy.
Purchases of gold by China to date are in my opinion very modest relative to their real buying power. As I have stated before I do not think that the administration there is prepared to shoot itself in the foot on this issue. Gold is just too politicized a commodity worldwide and there are just too many eyes watching and too many ears listening to whatever China does in the Gold arena. Very focussed eyes and ears too.
My strong belief has always been that the Chinese will invest their dollar wealth in alternative commodity plays and that it would do so in countries or on continents that welcome their advances (and need the money). My rationale was well rewarded recently when I learned of the very extensive commitments to commodities that China had made in South America, Africa and Australia. Copper in particular has been a headline story.
But in answer to your question I will respond with another question. Do you believe in open market economies? And do you think it is unpatriotic to sell an interest in a gold claim in California to China while some of North Americas biggest mining outfits take ore out of China? We cannot have it both ways can we.
I will suggest to you that if we will bar Chinese investment in North America then we will also be barred from direct investments in Asia. Is that the world you want? I don't think that you understand that we actually hold the advantage in this scenario, have some of the very strongest companies in the field and the depth of technological and engineering know-how to still be the best at the game.
The sword cuts both ways "Boxed Merlot" It has nothing to do with patriotism. It is just money and it is only about access to resources. Despite so many stories that suggest that America is bankrupting the real truth is that our wealth is just shifting and finding a new home in areas where there are better opportunities. Foreign opportunities abound.
And that is not something we want to put the brakes on even if it seems unpatriotic to you right now. America is still building wealth but more and more it will take place outside our borders.
On Jun 26 12:51 PM Boxed Merlot wrote:
> Does that mean you would consider selling gold reserves, say in a
> mining claim in California to a Chinese consortium a proper and "patriotic"
> act? Just wondering...
On Jun 26 02:46 PM Socialism cannot compete! wrote:
> Being smart at physics does not mean one is smart at philosophy or
> other truths.
On Jun 27 11:17 AM montyman wrote:
> Thanks to Obama? What an idiotic statement. This crisis was in full
> swing long before Obama got into office.
thehonesttrader.blogsp...
I'm not crazy about what is going on, but I do not have a viable alternative solution.
Many of us ar etired on nay sayers who say nay and have no solution.
What is your plan?
G
On Jun 27 01:03 PM realold wrote:
> Yes, the problem has been underway since at least Lyndon Johnson,
> and is now "cubed" by the ultimate liberal with a least common denominator
> oriented goal. Equal unhappiness and misery for all is hardly the
> prescription for digging out.
On Jun 26 06:54 PM Plebian wrote:
> In the past, fiat currencies have always failed. Today, because
> the whole world is on the fiat money system, do we suppose it can
> endure? Replacing a rotten apple (US$) with a basket of rotten oranges,
> pears, and bananas (basket of currencies) seems hardly the proper
> solution. Sure, the other fruits might last a little longer due
> to different degrees of deterioration, but in the end they will all
> waste away still.
>
> Everyone needs to learn that money is a store of human labor. That
> means that those who create money get rich off of those who labor
> to pay off debts, because money in the current system is created
> out of debt. Therefore, it is easy to conclude that those who have
> been given the power to create money will want to keep alive a system
> that has served them so well for so long. Debt is slavery, and only
> a return to gold and silver can set the world free from the bondage
> of fiat money.
On Jun 27 07:55 AM a. palmer jr. wrote:
> I'm actually more concerned with China wanting to buy up American
> property than gold right now. Do we really want the Chinese communists
> owning America? Remember that in a lot of the wars we fought in,
> the Chinese were our enemies. They provided arms for the North Vietnamese,
> the North Koreans and probably still are helping North Korea. Do
> any of you honestly think China all of a sudden started acting in
> our best interests? I liked it better when we boycotted their products.
> We've made China more powerful all for what...because they work cheaper
> than your neighbor does so we sell him out and trade with people
> who hate us.
On Jun 26 12:28 PM User 357705 wrote:
> "Great spirits have always found violent opposition from mediocrities.
> The latter cannot understand it when a man does not thoughtlessly
> submit to hereditary prejudices, but honestly and courageously uses
> his intelligence." A. Einstein
>
> Anyone on SA smarter than AE come forward at once.
“Smarter”? Do you mean if someone out there is honestly and courageously using his intelligence to a greater degree than Albert Einstein they have your permission to participate? That would be pretty difficult to measure, I suppose. But given enough time and resources to study the proposition, it could probably be done. Maybe you could ask for a grant to study the subject.
In lieu of a definitive assessment, please accept a few additional quotes I’ve enjoyed that were evidently attributed to him:
"If we knew what it was we were doing, it would not be called research, would it?"
and “God doesn't play dice.” -- Albert Einstein
He had a few funny things to say about intelligence too, i.e. his recognition of how puny it is in comparison to the magnificence of creation. But I also find his comment on income tax particularly entertaining when he said “The hardest thing in the world to understand is the income tax.” Considering he died in 1955, it would be even harder to imagine what he would say about our current tax code.
Hey great; we have a functioning free market here where the interest of both buyers and sellers are met. As to the wisdom behind the strategies of both parties involved I tend to see the Chinese winning the race of global redistribution by many horse-lengths.
In order not to clog comments, pls read more at prudentinvestor.blogsp...
Why? The answer is short and simple. It doesn't take them to consult the Sun Tze principles. It is vulnerable. In times of conflict as with the cases with Cuba, Iran, Saddam, among others, hard assets could readily be frozen.
On Jun 27 09:54 PM Market Sniper wrote:
> I would not worry about that too much. The Chinese are smart. They
> are NOT going to buy much of anything here they cannot ship out for
> a very good reason...called alien exclusion acts which make foreign
> ownership of real property illegal. It would be subject to confiscation
> after the USA goes bankrupt. IF the USA becomes a banana republic,
> expect it to act like a banana republic.
…But in answer to your question I will respond with another question. Do you believe in open market economies? And do you think it is unpatriotic to sell an interest in a gold claim in California to China while some of North Americas biggest mining outfits take ore out of China? We cannot have it both ways can we.
I will suggest to you that if we will bar Chinese investment in North America then we will also be barred from direct investments in Asia. Is that the world you want? I don't think that you understand that we actually hold the advantage in this scenario, have some of the very strongest companies in the field and the depth of technological and engineering know-how to still be the best at the game.
The sword cuts both ways "Boxed Merlot" It has nothing to do with patriotism. It is just money and it is only about access to resources. Despite so many stories that suggest that America is bankrupting the real truth is that our wealth is just shifting and finding a new home in areas where there are better opportunities. Foreign opportunities abound.
And that is not something we want to put the brakes on even if it seems unpatriotic to you right now. America is still building wealth but more and more it will take place outside our borders…”
Thank you for your thoughtful response. I apologize that I didn’t see it before I took 357705’s bait and responded to him.
The short answer to your first question is yes, I do believe in Open Market Economies. In fact so much so that I believe they will exist whether I believe in them or not. However, it breaks my heart that US “wealth is just shifting and finding a new home in areas where there are better opportunities. Foreign opportunities…”
I wouldn’t have such a problem with this if it were not for the fact that China holds nearly 2 trillion in interest bearing notes against us. This thought of being in debt to a country as a result of our inability to access our own resources due to regulation, a “not in my backyard” attitude, presupposition of a "too dangerous" activity or possibilty of offending plays into this dilemma too. They have accumulated this position against us, not entirely because we are such professional consumers, but because they play in a different league than we do. It seems odd that a country with a 14 trillion GNP requires foreign investments to continue functioning.
So if true Globalization is attained, would we look more like them or would they look more like us? Come to think of it, it would be refreshing if our university students would laugh when told by government officials that our debt instruments are good buys.
> A downside of purchasing gold is that the money spent to do so does
> not address China's huge infrastructure needs. This will keep cost
> of production higher than it should be if it were really a capitalist
> economy. China will be vulnerable to competition that invests capital
> in order to increase productivity. Already China is loosing manufacturing
> jobs to such competition. Yes, even in China governments often make
> very bad capital allocation decisions.
>
> knowledge.wharton.upen...
But I don't think they are buying *only* gold. They are also stockpiling oil, steel copper and other resources. I've read they are also building much new infrastructure such as highways, roads & bridges.
They've obviously been building factories at an extremely rapid clip and have purchased more cars than have been sold in the U.S. so far this year.
Buying gold just seems to be one part of their portfolio and overall economic plan. The gold can be used to purchase other things down the line and is probably a lot more likely to hold its value for that purpose than holding an equivalent amount of dollars and bonds at today's prices.
Or so it seems to me.