The United States is Helping China Buy Gold
April 22, 2016 1 Comment
In June 2015, China declared having bought 604.34 tonnes of gold. It’s last declaration before this had come in April 2009, when it had declared to having bought 454 tonnes of gold.
It couldn’t have bought such a huge amount of gold all at once given the limited supply of the yellow metal. Between April 2009 and June 2015, China regularly bought gold. It only declared it all at once in June 2015. The country had followed a similar strategy before April 2009, as well. It had last declared having bought 99.5 tonnes of gold in December 2002.
Hence, even though China has been buying gold all along, it has chosen to do so quietly, instead of going public with it. The reason for this was fairly straightforward. Gold is a thinly traded commodity, and hence, it makes sense for China to keep accumulating gold at a slow and regular pace, without making its intentions public and driving up the price.
Having said that since June 2015, there has been a change in strategy. Between July 2015 and February 2016 (the latest data that is available) the country has been making monthly declarations of the purchases it has been making.
These purchases vary from a minimum of 9.95 tonnes in February 2016 to a maximum of 20.84 tonnes in November 2016. Officially, China now has 1,788.4 tonnes of gold. It is the sixth largest gold owner in the world.
|Tonnes||% of reserves**|
While in absolute terms 1,788.4 tonnes of gold sounds quite a lot, when it comes to gold as a percentage of reserves, the country still needs to catch up with other countries. As can be seen from the above table, China’s gold hoard as a percentage of its reserves is the lowest among the top eleven hoarders of gold.
While officially China may have 1,788.4 tonnes of gold, experts who are in the know of such things, suggest, that China has more gold than it is currently showing.
As James Rickards writes in The New Case for Gold: “The most interesting case is China…We know from various reliable sources including mining production and import statistics that their actual gold stock is close to 4000 tonnes. I’ve spoken to refineries and secure logistics firms—people who actually handle physical gold—in addition to official sources, and included their information in my estimates. On the whole, there is enough credible information available to support this estimate at a minimum. It is also entirely possible that China has considerably more than 4000 tonnes.”
So what this means is that the Chinese government’s real gold hoard is at least 2.2 times its official one.
In fact, Rickards in his book The Death of Money explains how China has gone about accumulating gold over the years. The country buys gold through secret agents based out of London. These agents are known to be very disciplined, and they buy gold whenever the gold price falls significantly. The gold these agents buy is paid for by the State Administration for Foreign Exchange (SAFE), one of China’s sovereign wealth funds.
The gold bought by SAFE is later transferred to the People’s Bank of China, the Chinese central bank. China also buys gold from mines directly. During April to June 2013, when the price of gold had reached a low of $1,200 per ounce, the country bought 600 tonnes of gold directly from Australia’s Perth Mint.
Also, China is now the largest producer of gold in the world. The disadvantage with China’s gold production is that it does not really have any big gold mines and a lot of gold that it produces comes as a by-product in the mining of other base metals. The Chinese government buys gold from the mines within China but does not report these buys. These reasons also explain why China’s gold hoard is actually significantly bigger than what it is telling the world.
In fact, China’s gold hoard maybe more than 4000 tonnes because Rickards seems to have made this estimate in July 2015, when China’s official gold hoard was at 1,658 tonnes. Since then, the number has officially risen to 1,788.4 tonnes.
The question is why is China buying gold? As Rickards explains in The New Case for Gold: “China’s acquisition of more than three thousand tonnes of gold in the past seven years represents almost 10 percent of all the official gold in the world…China is trying to acquire enough gold so that when the international monetary collapse comes and the world has to recut the deal, China will have a prime seat at the table. Countries like Canada, Australia, and the United Kingdom, with small gold-to-GDP ratios will be seated away from the table.”
Currently, the global financial system revolves around the dollar. Given that so much of it has been printed (or rather created digitally) in the last few years, there is the threat of the current financial system collapsing due to high inflation.
When the time for the new financial system comes around, China wants to be in the driver’s seat along with the United States, Germany and Russia, countries which have a significant amount of gold.
It needs to be mentioned here that China owns a significant amount of US treasury securities. These are bonds issued by the US government to finance its fiscal deficit or the difference between what it earns and what it spends. As of end February 2016, China owned $1.25 trillion of the total $6 trillion worth of treasury securities owned by foreign investors.
As I mentioned earlier, the United States has printed a huge amount of dollars over the last few years. This has led to a situation where the chances of a high inflation scenario remain. If something like this were to happen, then the value of the Chinese investment in US treasury securities will fall.
Hence, there is a quid pro quo which is currently at work. As Rickards writes: “The compromise between the Fed’s desire for inflation and China’s desire to protect its reserves is for China to buy cheap gold. That way, if inflation is low, China’s gold won’t go up much, but the value of its paper Treasury reserves is preserved. If the United States gets the inflation it wants, China’s Treasuries will be worth less, yet its gold will be worth much more. Having Treasuries and gold is a hedged position that protects China’s wealth.”
As Ricakrds further points out: “What remains is a strange condominium of interests where the [American] Treasury and China are in agreement that China needs more gold and the price cannot be too high or else China could not easily afford all it needs…The United States is letting China manipulate the market so China can buy gold more cheaply. The Fed occasionally manipulates the market as well so that any price rise isn’t disorderly.”
The question is when will this manipulation end?
The column was published on the Vivek Kaul Diary on April 22, 2016