Much speculation abounds regarding China’s gold holdings. They
officially claim 1,054 tons as of April 2009. We suspected they might
“re” announce their holdings again last year at this time as it was five
years after their last announcement and China has a habit of “five year
plans”. Alisdair Mcleod believes they have 20,000 tons or more which
very well may be the case, I can easily make a case their holdings are far in
excess of 10,000 tons just from the data since 2009. In the words of
our newest presidential candidate, “at this point, what difference does it
make?”. We’ll get to this shortly.
Before getting into the answer to this question, it might be better look
at China’s “bubbles” first.
Money supply:
As you can see, China’s money supply has gone from 30 trillion yuan to
over 120 trillion yuan in 8 years. The growth rate compounds out to
about 18% annually. The following chart shows their money supply growth
slowing drastically, China will need to reflate soon!
Now let’s look at China’s Shanghai stock market, another bubble.
So, why exactly does it matter how much gold China has accumulated and
what are the ramifications depending what the number is? First, if the
number comes in “large” (it will), it means China “likes gold” and believes
it to be a worthy monetary reserve asset. A large number would give
gold China’s “stamp of approval” so to speak.
Next, we have the “mathematics” to the equation. If the number comes
in anywhere near 10,000 tons, the natural question then becomes “where oh
where did it all come from”? This is a VERY important question because
as I’ve said many times before, gold can only come from current supply and also
from above ground supplies in vaults. We know the total annual global
supply (ex China and Russia) is about 2,200 tons of which China has chewed up
a very large percentage over the last six years. Total global
production has been 11,000 tons over the last six years, we know India and
Russia have been importers, not to mention all the other geographical demand
and jewelry. A number even close to 10,000 tons will raise the question
of “how?”, how could China have accumulated this much gold if the world is
not producing enough to make the math work? In other words, if China
bought virtually all of the global supply, what was used to satisfy the rest
of the world’s demand?
The answer is easy and so will be the reaction. The gold MUST have
come from Western vaults, namely N.Y. and London. It would also explain
the refineries working 24/7 to melt 400 ounce bars and create kilo bars …they
were in fact heading to China! The big questions will be “which
vaults?” and then of course “who’s gold was it?”. This really matters
because a number of 10,000 tons or more would most likely mean the U.S. has
dishoarded its gold …and/or sold gold which belonged to someone else.
It will bring up the rule of law if the gold is someone else’s, it will bring
up Constitutional law if the gold came from Ft. Knox, West Point or another
depository. Please remember that five years ago or so, gold on the
market was turning up which had very similar, if not identical “fingerprints”
to our own “coin melt” from the 1930′s. To me, this was as big a
telltale sign as gold turning up in 1989 with the “Czar’s stamp” on it.
The report of 10,000 tons or more held by China will on its own drive gold
prices exponential because of the logic that market participants will connect
swiftly. Between the “stamp of approval” and “where did the gold come
from”, people will understand the West were the sellers. Does selling
one’s gold make your currency weaker? Of course it does. Does a
weaker currency make it harder to accumulate gold? Again, yes. It
is my contention that not only will a weaker currency (the dollar) make it
harder to “catch up” and replenish the empty vaults, China will have
incentive to “help this process along” by forcing the price higher and more
difficult to accumulate.
As mentioned and illustrated above, China has not been immune to the
bubblemania gripping the world. They are living their own bubble and
have exploded their own money supply yet now have the need to goose it
again. If this reverses and becomes an outright contraction, China
will be faced with the same dilemma the U.S. was in 1932-1933, they will need
to re price gold higher in an effort to devalue their currency and reflate
their own system. It is for this reason I believe they will “set” a
price and bid for any and all gold similar to what FDR did when gold was
revalued to $35.
A holding’s announcement and higher bid will do much for China.
It will cement their position of financial strength and also lock many buyers
out …not to mention turn some holders into sellers. Thus
increasing China’s holdings even more. The higher gold price will act
as a “filler” for many of the losses China will surely take from paper
financial holdings. A higher gold price will be their internal
financial penicillin assuring the financial wounds heal rather than spread
and infect the entire body. Quite oversimplified but please understand
this has been the remedy many times before throughout history, either
willingly or dragged by the ears!
