China buys 223.5 metric tons of gold in March...

Mohave
By Mohave on Thu, May 9, 2013 - 2:36pm

 

And they say April purchases might be bigger still. This chart is mind-blowing. Is China accelerating their gold purchases? If so, why?

http://dailyreckoning.com/a-gold-number-literally-off-the-charts/

,

6 Comments

kurtgirdler's picture
kurtgirdler
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Posts: 1
My 2 yuan's worth

I have been following news items re China's ever growing Gold purchases for a couple of years now. My ears first pricked up when I also read that China is allegedly the world's biggest gold producer & does not export at all.

So I started pondering on all this and came up with 2 possible theories:

1) the Chinese are being fiscally responsible, building a strong financial base in an ever more unstable financial world; or

2) what I like to refer to as my "conspiracy theory": What if, at some point in the not too distant future, when China's gold reserves are many times that of the US (arguably now???) the Chinese stopped purchasing all US Treasuries, announced they had completely lost faith in those US Treasuries, essentially wrote off the billions it is currently owed, and announced a new gold-backed Chinese Yuan Renminbi immediately available for use as the new, sound international currency for trade purposes?  That was a hellova sentence, I know, but I think the result would be so catastrophic to the financial markets of the western world China would become the dominant world power. 

By default.

Without firing a single shot.

I hope to God I am wrong.

Grover's picture
Grover
Status: Platinum Member (Offline)
Joined: Feb 16 2011
Posts: 864
The time ain't right

kurtgirdler,

China is accumulating gold. They're encouraging their citizens to accumulate as well. Since the government is still communistic, does that mean that the citizens will be relieved of their stashes in the future? Could happen.

Right now, China is still trying to stimulate employment by being the world's exporter. They also have a sliding link to the dollar. Currently, you can exchange 1 dollar for 6.14 yuan. For China's yuan to be a threat to the dollar's reserve status, they would need to abandon their manufacturing export model and become a net importer. (Remember that the US's biggest export is the dollar.) Is China secure enough in it's future to abandon the policies of the last 30+ years?

They have hundreds of millions of peasants willing to work in the city factories for a pittance ... simply because that is a better option than staying on the farm. If there isn't any hope of a better future, will these peasants stay home quietly dieing? When you have nothing to lose, you've got nothing to lose.

I'm not too worried about China pulling the rug out from under the reserve currency status of the dollar - at least, not for quite some time. China has long term vision. They will quietly accumulate PMs while they can. When the time is right, they'll make a move.

Grover

Nick Hill's picture
Nick Hill
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Posts: 5
In response to Grover, RE: China is accumulating gold.

China is accumulating gold. They're encouraging their citizens to accumulate as well. Since the government is still communistic, does that mean that the citizens will be relieved of their stashes in the future? Could happen.

Expropriating secretly deposited and unregistered stashes of PMs would be a relatively difficult method for a government to use to expropriate buying power from it's citizens. A simpler method would be to encourage citizens to use your currency as a store of wealth then debase it.

The American Roosevelt government of 5th April 1933 which issued presidential executive order 6102 wasn't overtly communist, yet it expropriated gold from the American public.

Right now, China is still trying to stimulate employment by being the world's exporter. They also have a sliding link to the dollar. Currently, you can exchange 1 dollar for 6.14 yuan. For China's yuan to be a threat to the dollar's reserve status, they would need to abandon their manufacturing export model and become a net importer. (Remember that the US's biggest export is the dollar.) Is China secure enough in it's future to abandon the policies of the last 30+ years?

If the Yuan became an un-backed fiat reserve currency, as the American Dollar enjoys now, then it would indeed be harder for China to have an export driven economy. The benefits China would enjoy from reserve currency status would create a strong head wind to manufacturers and a tail wind for consumers. I wonder whether there would be an appetite for another fiat reserve currency once the USD falls from reserve status, with the collapse that would ensue.

They have hundreds of millions of peasants willing to work in the city factories for a pittance ... simply because that is a better option than staying on the farm. If there isn't any hope of a better future, will these peasants stay home quietly dieing? When you have nothing to lose, you've got nothing to lose.

From our perspective it is a pittance. From theirs, perhaps not. Quietly dying? Chinese families tend to support each other. They don't tend to look to the state as we in the west have become so accustomed to. No hope for a better future? China has a dynamic economy with perhaps the greatest manufacturing technology concentration in the world. The average car in China is a Honda Accord or Toyota Camry equivalent. I suggest when they look to the future, it is too bright to see. I suggest that a reserve currency collapse would see our future looking like their today and vice versa.

I'm not too worried about China pulling the rug out from under the reserve currency status of the dollar - at least, not for quite some time. China has long term vision. They will quietly accumulate Pms while they can. When the time is right, they'll make a move.

Grover

Calling when would be difficult. The only reason I can think China would accumulate PMs given they have a raw material hungry manufacturing economy, would be to store wealth in a form that the chinese government believes will re-assert itself as money when what currently passes for money vanishes. We already see trade arrangements publicly slotting into place not using the USD as an intermediary. Massive hoarding by perhaps in real terms the biggest manufacturing economy (China). We see the Bernanke bowing out in January. Independent states looking increasingly eastward. My tea leaves tell me the horizon for USD isn't so far.

-Nick Hill

 

Grover's picture
Grover
Status: Platinum Member (Offline)
Joined: Feb 16 2011
Posts: 864
Legitimacy
Nick Hill wrote:

Expropriating secretly deposited and unregistered stashes of PMs would be a relatively difficult method for a government to use to expropriate buying power from it's citizens. A simpler method would be to encourage citizens to use your currency as a store of wealth then debase it.

Nick,

Is the goal to expropriate buying power from the citizens, or to accumulate as much gold as possible? The Chinese government has near totalitarian control over the population already. Ironically, the government has been forced to strengthen the yuan to keep inflation somewhat controlled.

Nick Hill wrote:

The American Roosevelt government of 5th April 1933 which issued presidential executive order 6102 wasn't overtly communist, yet it expropriated gold from the American public.

You are correct that FDR expropriated gold from US citizens. Is it impossible to think that the Chinese government wouldn't try the same tactic? Isn't their system much more amenable to this arrangement than the US of 1933? And yet, it happened here.

Nick Hill wrote:

If the Yuan became an un-backed fiat reserve currency, as the American Dollar enjoys now, then it would indeed be harder for China to have an export driven economy. The benefits China would enjoy from reserve currency status would create a strong head wind to manufacturers and a tail wind for consumers. I wonder whether there would be an appetite for another fiat reserve currency once the USD falls from reserve status, with the collapse that would ensue.

Think about it. When the Bretton Woods agreement set the dollar as a de facto reserve currency, other countries had to have dollars in reserve to transact business. The only way they could get them would be for us to give them dollars (foreign aid) or for them to exchange goods and services for dollars. Our foreign aid started with the need of these countries to have dollars so they could buy our manufactured goods. Eventually, manufacturing shifted overseas and the predominant method for them to get dollars has become sales and lender financing.

China has taken this to an extreme. What do they do with all the dollars? If they didn't print an equivalent amount of yuan, the yuan would gain strength quickly. That would erode their advantage as the low cost manufacturer and would reduce employment. It is better (based on their actions) to control the rate of strengthening.

I agree with your assessment of head winds and tail winds. I also doubt that the world will have appetite for another fiat reserve currency. That is why gold is so important to them. It gives them legitimacy on the world stage. Their CB is buying gold, they're keeping all the domestic mined gold, they're allowing the people to own it (for now,) and they're importing more than ever. There is also the secrecy thing. They don't announce their intentions until after the fact. We don't know how much gold they claim to own.

Grover wrote:

They have hundreds of millions of peasants willing to work in the city factories for a pittance ... simply because that is a better option than staying on the farm. If there isn't any hope of a better future, will these peasants stay home quietly dieing? When you have nothing to lose, you've got nothing to lose.

Nick Hill wrote:

From our perspective it is a pittance. From theirs, perhaps not. Quietly dying? Chinese families tend to support each other. They don't tend to look to the state as we in the west have become so accustomed to. No hope for a better future? China has a dynamic economy with perhaps the greatest manufacturing technology concentration in the world. The average car in China is a Honda Accord or Toyota Camry equivalent. I suggest when they look to the future, it is too bright to see. I suggest that a reserve currency collapse would see our future looking like their today and vice versa.

I think you misread my paragraph. We're in substantial agreement; however, I don't think their future is "too bright to see." It is more "too polluted to see." The central planners (communist party) wish to remain in power at all costs - including environmental degradation. They have to provide work for their people so they have hope that the economic future will be brighter ... or they have to deal with the possibility of revolt. As I said, "When you have nothing to lose, you've got nothing to lose." A fat, dumb, and placated populace doesn't have reason to revolt. Starving and hopeless people have nothing to lose.

Nick Hill wrote:

Calling when would be difficult. The only reason I can think China would accumulate PMs given they have a raw material hungry manufacturing economy, would be to store wealth in a form that the chinese government believes will re-assert itself as money when what currently passes for money vanishes. We already see trade arrangements publicly slotting into place not using the USD as an intermediary. Massive hoarding by perhaps in real terms the biggest manufacturing economy (China). We see the Bernanke bowing out in January. Independent states looking increasingly eastward. My tea leaves tell me the horizon for USD isn't so far.

-Nick Hill

Agreed. Calling when is difficult. Gold gives them legitimacy. They don't want to be second to the US or any other nation. Bernanke bowing out will be a short term disruption. Shortly after the new chairman is installed, the financial types will have a new BFF.

Your tea leaves may tell you that the USD has numbered days, but it can go on much longer than we expect. (It already has continued much longer than I expected.) As long as we have a strong military to enforce (or threaten to enforce) our will, the dollar will remain supreme. Why else would we spend nearly half the world's military budget?

Grover

Nick Hill's picture
Nick Hill
Status: Member (Offline)
Joined: Nov 19 2012
Posts: 5
Is the goal to expropriate

Is the goal to expropriate buying power from the citizens, or to accumulate as much gold as possible? The Chinese government has near totalitarian control over the population already. Ironically, the government has been forced to strengthen the yuan to keep inflation somewhat controlled.

It is perhaps easier to stash PMs out of governments reach for extended periods than any other store of wealth. PM=Buying power in financial catastrophe.

You are correct that FDR expropriated gold from US citizens. Is it impossible to think that the Chinese government wouldn't try the same tactic? Isn't their system much more amenable to this arrangement than the US of 1933? And yet, it happened here.

Of course they could try an FDR tactic. I'm making the point that the chinese government allegedly being communist is a red herring (pun intended).

I agree that China has problems with polution, but my point is that I think the stage is set for east-west financial fortune reversal. I think you and I disagree on that point. Other points, I think we agree on.

 

Grover's picture
Grover
Status: Platinum Member (Offline)
Joined: Feb 16 2011
Posts: 864
Patience is worth the wait
Nick Hill wrote:

I agree that China has problems with polution, but my point is that I think the stage is set for east-west financial fortune reversal. I think you and I disagree on that point. Other points, I think we agree on.

Nick,

I'd say timing is about the only thing we disagree on. The western debt binge will end badly. China has positioned their country to take advantage of the situation. Where we in the West have a long term outlook measured in quarters, theirs is measured in centuries. They will use our momentum against us. (tai chi?)

As long as we have our military strength, they will continue their role as global manufacturer. They will follow the US's example when we retooled in WWII to become the world's dominant force. Looking at it from China's long term perspective: Is it better to fight an enemy who is past his prime, but still standing ... or is it better to step over an exhausted foe and casually glean the treasures?

Grover

PS - I appreciate appropriate puns. Thanks.

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