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This eye-opening article explains how China is influencing gold demand and prices
and what it means for Western investors. Readers will discover how much gold China is really buying and steps they are taking to undermine the U.S. Dollar as the world reserve currency. It even includes a prediction for gold prices. It’s a must-read for any precious metals investor [to help you determine] how well your portfolio is geared for a “Chinese” future.
The above introductory comments* come from GoldSilverWorlds.com to an article** by Jeff Clark (caseyresearch.com) entitled The Truth about China’s Massive Gold Hoard.
The following article is presented courtesy of Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), and www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and has been edited, abridged and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.
Clark goes on to say in edited excerpts from the original article:
The Chinese think differently about gold. They view gold in the context of its role throughout history and dismiss the Western economist who arrogantly declares it an outdated relic. They buy in preparation for a new monetary order—not as a trade they hope earns them a profit.
Combine gold’s historical role with current events, and we would all do well to view our holdings in a slightly more “Chinese” light, one that will give us a more accurate indication of whether we have enough, of what purpose it will actually serve in our portfolio, and maybe even when we should sell (or not).
China’s Gold Demand
Many articles point to lower net imports through Hong Kong in the second quarter of the year…[but they] overlook the fact that the Chinese government now accepts gold imports directly into Beijing…
- China GROSSLY Understates Its Gold Reserves! Here’s Why & What They REALLY Are
- China Continues Buying Gold Like There Was No Tomorrow! Here Are the Impressive Numbers
- China Converting U.S. Dollar Debt Holdings Into Gold At Accelerating Rate
Bypassing the normal trade routes means these shipments are essentially done in secret…allowing Beijing to continue accumulating physical gold without the rest of us knowing the amounts. This move doesn’t imply demand is falling—just the opposite.
China’s Gold Reserves As % Of GDP
Almost every report you’ll read about gold reserves – even the World Gold Council – measures them in relation to their total reserves. The U.S., for example, has 73% of its reserves in gold, while China officially has just 1.3%, but this calculation is misleading.
A more practical measure is to compare gold reserves to GDP. This would tell us how much gold would be available to support the economy in the event of a global currency crisis, a major reason for having foreign reserves in the first place and something Chinese leaders are clearly preparing for.
The following table shows the top six holders of gold in GDP terms. (Eurozone countries are combined into one.) Notice what happens to China’s gold-to-GDP ratio when their holdings move from the last-reported 1,054-tonne figure to an estimated 4,500 tonnes (a reasonable figure based on import data).
| Country | Gold (Tonnes) |
Value US$ B ($1300 gold) |
GDP US$ B (2013) |
Gold Percent of GDP |
| Eurozone* | 10,786.3 | $450.8 | 12,716.30 | 3.5% |
| US | 8,133.5 | $339.9 | 16,799.70 | 2.0% |
| China** | 4,500.0 | $188.1 | 9,181.38 | 2.0% |
| Russia | 1,068.4 | $44.7 | 2,118.01 | 2.1% |
| India | 557.7 | $23.3 | 1,870.65 | 1.2% |
| Japan | 765.2 | $32.0 | 4,901.53 | 0.7% |
| China | 1,054.1 | $44.1 | 9,181.38 | 0.5% |
| *including 503.2 tonnes held by ECB | ||||
| **Projection | ||||
| Sources: World Gold Council, IMF, Casey Research proprietary calculations | ||||
At 4,500 tonnes, the ratio shows China would be on par with the top gold holders in the world. In fact, they would hold more gold than every country except the U.S. (assuming the U.S. and EU have all the gold they say they have). This is probably a more realistic gauge of how to determine…[the extent of a country’s gold reserves].
My estimate of 4,500 tonnes of current gold reserves might be high, but it may also be much less than whatever may ultimately satisfy China’s ambitions. Sooner or later, though, they’ll tell us what they have, but as above, that will be when it works to China’s benefit.
China GDP vs. Price of Gold
Most mainstream analysts point to the slowing pace of China’s economic growth as one big reason the gold price hasn’t broken out of its trading range. China is the world’s largest gold consumer, so on the surface, this would seem to make sense, but is there a direct connection between China’s GDP and the gold price?
Over the last six years, there has been a very slight inverse correlation (-0.07) between Chinese GDP and the gold price, meaning they act differently slightly more often than they act the same. Thus, the Western belief characterized above is inaccurate. The data signal that, if China’s economy were to slow, gold demand won’t necessarily decline.
The fact is that demand is projected to grow for reasons largely unrelated to whether their GDP ticks up or down. The World Gold Council estimates that China’s middle class is expected to grow by 200 million people, to 500 million, within six years. (The entire population of the U.S. is only 316 million.) They thus project that private sector demand for gold will increase 25% by 2017, due to rising incomes, bigger savings accounts, and continued rapid urbanization. (170 cities now have over one million inhabitants.) Throw in China’s deep-seated cultural affinity for gold and a supportive government, and the overall trend for gold demand in China is up.
China’s New Global Gold Exchange
The price of gold…is largely a function of what happens at the Comex in New York…[because] the West trades in gold derivatives, while the Shanghai Gold Exchange (SGE) primarily trades in physical metal. The Comex can thus have an outsized impact on the price, compared to the amount of metal physically changing hands…but a shift is underway.
In May, China approached foreign bullion banks – HSBC, Standard Bank, Standard Chartered, Bank of Nova Scotia, and the Australia and New Zealand Banking Group (ANZ); producing companies, foreign institutions; and private investors – to participate in a global gold exchange…[located] in Shanghai’s “pilot free-trade zone” to eventually challenge the dominance of New York and London…
The enormous amount of bullion China continues to buy reduces trading volume in North America [because] the Chinese don’t sell, so that metal won’t come back into the market anytime soon, if ever. This concern has already been publicly voiced by some on Wall Street, which gives you an idea of how real this trend is.
There are other related events, but the point is that going forward, China will have increasing sway over the gold price (as will other countries: the Dubai Gold and Commodities Exchange is to begin a spot gold contract within three months) – and that’s a good thing, in our view.
China – and Others – Increasing Global Trade In Non-U.S. Dollars
In spite of all the warning signs, the U.S. dollar is still the backbone of global trading. “It’s the go-to currency everywhere in the world,” say government economists. When a gold bug (or anyone else) claims the dollar is doomed, they laugh, but who will get the last laugh?
- Over the next 30 years, about $400 billion of natural gas from Siberia will be exported to China…This is big. The twist is that transactions will not be in US dollars, but in yuan and rubles. This is a serious blow to the petrodollar...
- Gazprom has signed agreements with consumers to switch from dollars to euros for payments. The head of the company said that nine of ten consumers have agreed to switch to euros.
- Putin told foreign journalists at the St. Petersburg International Economic Forum that “China and Russia will consider further steps to shift to the use of national currencies in bilateral transactions.” In fact, a yuan-ruble swap facility that excludes the greenback has already been set up.
- Beijing and Moscow have created a joint ratings agency and are now “ready for transactions… in rubles and yuan,” said the Russian Finance Minister Anton Siluanov. Many Russian companies have already switched contracts to yuan, partly to escape Western sanctions.
- Beijing already has in place numerous agreements with major trading partners, such as Brazil and the Eurozone, that bypass the dollar.
- Brazil, Russia, India, China, and South Africa (the BRICS countries) announced last week that they are “seeking alternatives to the existing world order.” The five countries unveiled a $100 billion fund to fight financial crises, their version of the IMF. They will also launch a World Bank alternative, a new bank that will make loans for infrastructure projects across the developing world.
You don’t need a crystal ball to see the future for the U.S. dollar; the trend is clearly moving against it. An increasing amount of global trade will be done in other currencies, including the yuan, which will steadily weaken the demand for dollars.
The shift will be chaotic at times. Transitions this big come with complications, and not one of them will be good for the dollar – and there will be consequences for every dollar-based investment. US-dollar holders can only hope this process will be gradual. If it happens suddenly, all US-dollar based assets will suffer catastrophic consequences.
In his new book, The Death of Money, Jim Rickards says he believes this is exactly what will happen.
The clearest result for all U.S. citizens will be high inflation, perhaps at runaway levels—and much higher gold prices.
Conclusion
Only a deflationary bust could keep the gold price from going higher at some point. That is still entirely possible, yet even in that scenario, gold could “win” as most other assets crash. Otherwise, I’m convinced a mid-four-figure price of gold is in the cards.
Remember: It’s not about the price. It’s about the role gold will serve protecting wealth during a major currency upheaval that will severely impact everyone’s finances, investments, and standard of living.
Most advisors who look out to the horizon and see the same future China sees believe you should hold 20% of your investable assets in physical gold bullion. I agree. Anything less will probably not provide the kind of asset and lifestyle protection you’ll need.
In the meantime, don’t worry about the gold price. China’s got your back…
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://goldsilverworlds.com/physical-market/the-truth-about-chinas-massive-gold-hoard/; **http://www.caseyresearch.com/articles/the-truth-about-chinas-massive-gold-hoard (© 2014 Copyright Casey Research; Click here to get it all with a 90-day risk-free trial to our inexpensive BIG GOLD newsletter.)
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