Wikileaks Discloses The Reason(s) Behind China’s Shadow Gold Buying Spree

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  • Sat, Sep 03, 2011 - 10:03pm

    #1

    Johnny Oxygen

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    Wikileaks Discloses The Reason(s) Behind China’s Shadow Gold Buying Spree

http://www.zerohedge.com/news/wikileaks-discloses-reasons-behind-chinas-shadow-gold-buying-spree

Wondering why gold at $1850 is cheap, or why gold at double that price will also be cheap, or frankly at any price? Because, as the following leaked cable explains, gold is, to China at least, nothing but the opportunity cost of destroying the dollar’s reserve status. Putting that into dollar terms is, therefore, impractical at best, and illogical at worst. We have a suspicion that the following cable from the US embassy in China is about to go not viral but very much global, and prompt all those mutual fund managers who are on the golden sidelines to dip a toe in the 24 karat pool. The only thing that matters from China’s perspective is that "suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar’s role as the international reserve currency. China’s increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB." Now, what would happen if mutual and pension funds finally comprehend they are massively underinvested in the one asset which China is without a trace of doubt massively accumulating behind the scenes is nothing short of a worldwide scramble, not so much for paper, but every last ounce of physical gold…

  • Sun, Sep 04, 2011 - 02:33am

    #2

    dshields

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    yep…

Yep.  I believe it.  Having a lot of gold will be a good thing at some point.  Wish I had a pile of gold.  A pile.  A pile I could crawl up and sit on top of.  Something the size of a pallet of sod would work just fine.  In the meantime if I were the Chinese and had all those dollars I would be sending some of them on gold.  Gold to hold.  Launching a currency backed by gold would be a powerful thing in a world of fiat currencies and over spending welfare states.  People talk about a war with the Chinese.  They don’t need a war to beat us.  All they have to do is wait and we will beat ourselves.  It is just like the cold war.  We just waited and the Soviet Union beat itself.  If the Chinese wait we will beat ourselves.  If we do not get a handle on spending they will not have to wait very long – a few years.  Most Americans don’t even know what a reserve currency is or how it benefits them.  There will be a collective poop in the pants about one month after the dollar was replaced as the reserve currency of the world.  Every single person in America will know what it means then.

  • Sun, Sep 04, 2011 - 05:40am

    #3
    kenny qiu

    kenny qiu

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    China gold

 There is no way out for the Chinese economy since it imports most of its energy. There were only three Chinese research papers by the Chinese scholars in my Google search about peakoil. And they all miss the point by talking about oil reserve instead of consequence of peakoil

Chinese is the biggest food importer in the world today. The air,water and land are mostly polluted and inhabitable from American standard. To me it is a wasted land.  The Chinese gov. print 4 trillion money to flood the market during the finance crisis of 2008. Thus the Chinese has much less income than the Americans but their food cost is higher than the americans’. How long will such society can bond together? 

I don’t know how much gold can help the Chinese. It is a wrong move for the average Chinese to buy gold. They should buy U.S dollar to hedge renminbi and stock up rice first. They can’t eat gold.

 

 

  • Sun, Sep 04, 2011 - 07:25am

    #4

    Poet

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    Hmm…

The Wikileaks-revealed cable from April 28, 2009 is merely a transmittal of an EXCERPT of a Chinese news article. So while interesting, I wouldn’t consider it a "smoking gun" admission when it’s pretty much known that China is expanding it’s gold reserves as a result of dollar decline and to safeguard themselves.

Now if it were a secret admission from say, some senior Chinese government official to an American counterpart at the embassy, I think it would have a bigger impact.

3. CHINA'S GOLD RESERVES 
 
"China increases its gold reserves in order to kill two birds with 
one stone" 
 
The China Radio International sponsored newspaper World News Journal 
(Shijie Xinwenbao)(04/28): "According to China's National Foreign 
Exchanges Administration China's gold reserves have recently 
increased. Currently, the majority of its gold reserves have been 
located in the U.S. and European countries. The U.S. and Europe have 
always suppressed the rising price of gold. They intend to weaken 
gold's function as an international reserve currency. They don't 
want to see other countries turning to gold reserves instead of the 
U.S. dollar or Euro. Therefore, suppressing the price of gold is 
very beneficial for the U.S. in maintaining the U.S. dollar's role 
as the international reserve currency. China's increased gold 
reserves will thus act as a model and lead other countries towards 
reserving more gold. Large gold reserves are also beneficial in 
promoting the internationalization of the RMB." 

Poet

  • Sun, Sep 04, 2011 - 02:19pm

    #5

    Johnny Oxygen

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    Re: Yep

People talk about a war with the Chinese. They don’t need a war to beat us. All they have to do is wait and we will beat ourselves.

I’ve said this before. If the Chinese want to become part of the new world reserve currency, along with the rest of the BRICS, all the have to do is dump their 350 billion dollars of US treasuries on the market. The bond market would instantly collapse and the dollar along with it. The Chinese would make their money back in no time at all.

They have us by the balls not the other way around.

  • Mon, Sep 05, 2011 - 04:24pm

    #6
    Farmer Brown

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    Johnny Oxygen wrote: People

[quote=Johnny Oxygen]

People talk about a war with the Chinese. They don’t need a war to beat us. All they have to do is wait and we will beat ourselves.

I’ve said this before. If the Chinese want to become part of the new world reserve currency, along with the rest of the BRICS, all the have to do is dump their 350 billion dollars of US treasuries on the market. The bond market would instantly collapse and the dollar along with it. The Chinese would make their money back in no time at all.

They have us by the balls not the other way around.

[/quote]

JO,

Sorry but that is totally short-sighted and ignores what is in the best interest of China.  Even if they could do what you think they are capable of doing, it would ruin – no – destroy, their economy.  If they dumped US Treasuries, the RMB would go through the roof, and their export-based economy would fall through the floor.  Factories would close, unemployment would skyrocket, food shortages and civil unrest would abound, and they would probably lose control of the non-core Chinese regions (which is well over 50% of the geographic region we call "China").  In the meantime, the FED would probably pick those Treasuries up at bargain levels and life in the US would go on pretty much the same for the time being.  Also, since the US pretty much just buys crap from China, and not food or energy, I really do not see why we are so "dependent" on them. 

I really do not understand the fear of China or the awe with their so-called economy, which is totally engineered, centrally-planned, and even more distorted for the public’s consumption than our own BLS and other agency figures.

China has built an entire economy mostly upon one thing:  the manipulation of their own currency.  In order to maintain its competitive edge (which boils down to compete on price only), China must keep its currency low against the dollar.  The only way to do that when you are running a trade surplus is by printing more of your own currency just so you can buy/sterilize all the dollars coming in, and then use those dollars to invest in US Treasuries. 

So, this whole imbalance which is most manifest in huge Chinese dollar holdings is in reality the mirror image of the currency depreciation and devaluation (and outright theft really) they have imposed on their own people just to keep their currency low.  In other words, their dollar holdings are their own creation.  If they had allowed their currency to appreciate the moment they started to run a trade surplus, this never would have happened.  Those dollars instead would have stayed in the US or gone to the next 3rd world upstart economy.  Of course, the Chinese didn’t want that.  They chose this outcome and the US let them do it.

Now both countries are very much screwed, but believe me, the Chinese are just as screwed as the US is, perhaps more.  Here are just a few reasons why:

China must import food to feed its people.  The US can feed itself twice over, at least.

China has 1.4 billion people.  The US population of 330 million is really the equivalent of a Chinese rounding error when computing their own population.  Of those 1.4 billion, some 700 million live at poverty levels.  Try imagining what it’s like keeping 700 million (twice the US population) poor, hungry people from riotiong when food runs out, and you may begin to get an inkling of the kind of pressure Chinese authorities live under every day.  Maybe if they just tried free market capitalism without distortions, their people could feed themselves, but of course, that would be thinking way too outside the box for most communist party central planning engineers.  So, they’ll continue planning until it doesn’t work and everything breaks. 

China is composed of a coastal core region, where the culturally and economically dominant Chinese people live, and several enormous swaths of land, which do not share Chinese culture and wealth like the coastal regions do, and which historically have bounced in and out of the "Regime" depending on when coastal China was strong and when it was not.  Coastal China will do almost anything to keep those regions from breaking away.  These regions include Tibet, which you may have heard about.  They serve as buffer zones for coastal China and are strategically very important, but otherwise produce little.  Part of China’s planning includes making sure these regions do not break away or "cause trouble".  Would like to see how they manage that after they "dump" Treasuries and destroy their own economy. 

The US on the other hand, is pretty well culturally unified. There are political and religious sectors, but nothing like what is seen in China or other parts of the world for that matter.  Speaking of which, I heard that a former German chancellor today claim that the "Unites States of Europe will happen – it just needs time" or something to that effect.  I couldn’t disagree more.  Europe will never be like the US because it is culturally way too stratified.  The Czechs, Hungarians, Romananians, Germans, Polish, Slovenians, Slovakians, are DIFFERENT peoples with way too different cultural values  and customs – and those are just a few of the most stratified.  They should also celebrate these differences and keep them – that’s what makes the world a great place!  What they need to keep are open borders and free trade.  They’d be better off with independent currencies and no fiscal union – ever!

Anyway, China is the biggest white elephant the world has ever seen, in my opinion.   Others see a threat.  I see 1.4 billion people exporting crap to the rest of the world just fast enough so as to not starve.  I also see a 1.4 billion person disaster waiting to happen and a country that came very very late to the cheap energy party but is building a cheap-energy dependent nation.

 

 

 

 

 

  • Mon, Sep 05, 2011 - 05:08pm

    #7
    earthwise

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    Whew! Now I can sleep at night

 

So, Farmer Brown:

What you are essentially saying is that China is just as screwed as the US and Europe if not more so.

Gee, that makes me feel better.

  • Mon, Sep 05, 2011 - 05:36pm

    #8
    Farmer Brown

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    earthwise wrote:  So,

[quote=earthwise]

 

So, Farmer Brown:

What you are essentially saying is that China is just as screwed as the US and Europe if not more so.

Gee, that makes me feel better.

[/quote]

Well, there may not be a lot to feel good about, but there are things to feel less bad about, and imagining unecessary doomsday scenarios like the dumping of US Treasuries by the Chinese, is one thing I wouldn’t waste an ounce of sleep over.

  • Mon, Sep 05, 2011 - 05:39pm

    #9

    JAG

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    Farmer Brown wrote:If they

[quote=Farmer Brown]

If they had allowed their currency to appreciate the moment they started to run a trade surplus, this never would have happened.  Those dollars instead would have stayed in the US or gone to the next 3rd world upstart economy.  Of course, the Chinese didn’t want that.  They chose this outcome and the US let them do it.

[/quote]

I recall having this same conversation about 3 years ago….same conclusion then. 

Thanks for the nice recap FB!

  • Mon, Sep 05, 2011 - 07:48pm

    #10

    Johnny Oxygen

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    Sorry but that is totally

Sorry but that is totally short-sighted and ignores what is in the best interest of China.  Even if they could do what you think they are capable of doing, it would ruin – no – destroy, their economy.  If they dumped US Treasuries, the RMB would go through the roof, and their export-based economy would fall through the floor.  Factories would close, unemployment would skyrocket, food shortages and civil unrest would abound, and they would probably lose control of the non-core Chinese regions (which is well over 50% of the geographic region we call "China").  In the meantime, the FED would probably pick those Treasuries up at bargain levels and life in the US would go on pretty much the same for the time being.  Also, since the US pretty much just buys crap from China, and not food or energy, I really do not see why we are so "dependent" on them.

First off I’m not saying China will do it I’m saying they could if they wanted to.

China along with many other countries is fully aware that the all fiat currencies are going to take a hit. They are also aware of the current currency wars. My point is that China knows its going to take a big loss on US treasuries and it knows the game can’t go on forever.

China is leveraging its loss in US treasuries with gold and the purchase of hard assets like mines and arable land outside of China. The US dollar will continue to sink until it has depriciated so much that there is no possible way for China to break even on their investment. At some point losing 30% of your investment or losing 50% won’t matter much. The writing is on the wall. The Dollar is no longer the world reserve currency. Now a power vacuum exists and who doesn’t want to have a piece of the new world reserve pie? IMO that is what the whole BRIC union is about.

You say the FED would pick those treasuies up at bargain prices but you miss the point. No one will wants them. Faith is lost in them and what would the FED use to purchase them? More debt/money?

I’m not saying that we are dependent on China nor are they dependent on us. I’m saying that China doesn’t need the US or its debt any longer. They have bigger more long term plans.

Don’t forget China is a communist country. They don’t need to placate anyone or be democratic in anyway. What the leaders say goes and if people don’t like it so what?

Your assumption that China produces crap I think is a bit out dated. Their technology is moving along at a much better rate than our is. They have a sea of people that will work much cheaper than most parts of the world whether they work by circumstance or are forced to.

 

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