Declaration first: I'm long on many Gold and Silver Mining Stocks and I'm watching China to see what it does next, but then it seems we are all watching China.
As the Dollar declines Gold shines. The Fiat US dollar has been printed to death over the past twenty years. China sees it, and slowly, slowly most other dollar holders will come to see it.
China holds two trillion in financial assets, most of it dollars. It has just become the World's fifth largest holder of Gold with over 1000 tons and is now the largest producer of Gold with over 250 tons p/a.
China has also started (quietly) grumbling about the dollar.
There is no doubt that China would sell its' dollars right now if it could, and it is selling some, but as soon as it was perceived to do so in any big way the value of the dollar would fall heavily leaving China with a big reducing foreign asset value. China can't even be seen to stop purchasing the dollar, as this would send a strong signal to the markets, which are already very skittish.
So how does China get out of the dollar?
When the market value of China’s Gold and other precious metals equals the value of China’s dollar reserves their holdings will have reached equilibrium - that is the point where reduction of the value of their dollars as they are sold are matched by an increase in the value of their Gold. Then they can start to dump dollars and buy Gold in a big way, openly if they want. Up to this point they must buy Gold on every downturn of the Gold market in the greatest volume they can.
However I think by the time China reaches its' equilibrium point everyone and his brother will be buying Gold and selling Securities, so the pressure will be immense.
Of course the equilibrium point will move with the market and eventually the increases and decreases will even out, at which point the dollar and Gold will have reached their true market values, and I agree with GATA.com that $5000 per oz of Gold is that likely true value.
There is another possibility to China selling off its’ dollars; the Fiat Cartel could pay China Danegeld to hold its paper, (there is a rumor this just happened on the London Market where a large Gold futures buyer wanted the physical Gold at contract date and the shorted banks offered cash instead with a 25% premium).
Anyone like to guess when China’s Precious metal stocks will be of equal value to its’ dollar holding?
Disclosure: Long on Gold and Silver Mining Stocks, no ETF's.