China Concerns, Crashing Currencies and the Future of Gold Purchases

|
Includes: DBV, FXI, GLD, GOLD
by: The Sovereign Society

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.