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Let's start with
some big, but digestible numbers:
$3,950,000,000,000 = China’s total foreign exchange
reserves
$1,250,000,000,000 = Value of the world’s 31,866
metric tonnes gold reserve at $1220/troy ounce
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$1,280,000,000,000. = China’s holdings
of U.S. Treasuries in its foreign exchange reserves
$ 319,000,000,000. = Value of U.S. 8133
metric tonnes gold reserve at $1220/troy ounce
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Now let's delve into what those numbers might mean to the
average gold owner:
On the
occasion of the launch of the Shanghai International Gold Exchange on
September 19, 2014, Zhou Xiaochuan, the governor of the Peoples’ Bank
of China (PBOC), reflected on his country’s view of gold.
“[The] gold market,” he said, “is an important and integral
part of China’s financial market. We are now the largest gold producer,
as well as the biggest gold importer and consumer in the world. . . The
People’s Bank of China will continue to support the sustainable growth
and sound development of China’s gold market.”
“Can you imagine,” asks Koos Jansen, the
Holland-based expert on China’s gold market,
“Mario Draghi or Janet Yellen attending the opening
ceremony of a gold exchange in Frankfurt or New York, let alone speaking
about the importance of gold?”
When it comes to the gold market, China is the dragon in
the room. With its nearly $4 trillion in foreign exchange reserves and
potential purchasing power, that presence is formidable.
How formidable? Consider this:
- China could purchase the total United States gold
reserve (8133 metric tonnes) with 8% of its foreign exchange reserves.
- It could purchase the total global gold reserve (31,866
metric tonnes) with 32% of its foreign exchange reserves.
- It could purchase all the gold stored by Exchange Traded
Funds (+/- 1750 metric tonnes) with less than 2% of its foreign exchange
reserves.
- At $4900 per troy ounce, the value of U.S. gold
reserves would match China’s U.S. Treasury holdings of roughly $1.28
trillion.
- At $4700 per troy ounce, the value of the
world’s gold reserves would match China’s total foreign exchange
reserves of roughly $4 trillion.
- To put it another way, China could pay double the
current price for the world’s total gold reserve and still have nearly
$1.5 trillion in foreign exchange reserves.
- China sits atop the list of the world’s foreign
exchange holdings. The United States ranks thirteenth at $133 billion.
For the United States to ascend to the top of the rankings, it would need to
revalue its $319 billion gold reserve to almost $4 trillion – or raise
the value to just under $15,300 per troy ounce.
These numbers are daunting. And for those unfamiliar with
the massive scope of the monetary mess confronting the world's central banks,
they might appear unbelievable. At the core, though, the yawning chasm
between official sector gold and China's foreign exchange reserves suggests a
serious undervaluation of gold at current prices. This imbalance is not
likely to be addressed through mine production anytime soon, nor is it likely
to be addressed by some realignment of international gold reserves, as some
have suggested. Instead, the
most likely outcome will be a significant adjustment in gold’s market
price. It could come gradually or in fits and starts, or even all
at once. Somehow though, sometime down the road, the market will address the
imbalance. It always does. In fact, as some have suggested,
China–through its staunch advocacy of gold–might already be in
the process of forcing the issue.
For more information,
please see "Chinese Gold Demand Explosive"/Koos
Jansen/9-29-2014
In the meantime, the current monetary regime with the
dollar as its centerpiece will continue bumbling along until
something–probably another black swan event–intervenes.
Though some might see that bumbling along as a positive sign, others see it
as fraught with danger. Over the past few months, for example, several
emerging countries experienced sharp corrections in their currencies as a
result of institutions unwinding their vast dollar carry trades–a
process that is on-going. The damage done serves as a reminder of the
problems presented by an over-reliance on the dollar. None of this is
lost on either China or the other countries affected. Managing a nation's
reserves is not a whole lot different from managing one's personal investment
portfolio. Diversification makes a great deal of sense. As a result, the
trend among central banks to add gold reserves is likely to gather pace.
China, as suggested by PBOC governor Zhou's statement
above, has taken the lead in that regard. It has been steadily adding to its
official reserves and encouraging its citizenry to import the precious metal.
(See chart) In 2009, it announced a national reserve of 1059 tonnes.
The current level of reserves is a state secret, but some gold market
analysts have suggested a doubling since the 2009 announcement with one
analyst predicting an increase to 5000 tonnes. If the gold market is
looking for a bombshell to shake it out of its current lethargy, the
announcement of a major increase in China’s gold holdings would do the
trick.
In my view China would swap its foreign exchange reserves
for the world's gold supply in a heartbeat. It is a willing buyer perhaps
without equal. Jeff
Clark, senior precious metals analyst at Casey Research, puts it this way:
“[T]he 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.” Private investors might take note.
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*
With apologies to Henry Hazlitt, author of "Economics in One
Lesson" (1946) -- "The art of economics consists in looking not
merely at the immediate but at the longer effects of any act or policy; it
consists in tracing the consequences of that policy not merely for one group
but for all groups."
Michael J. Kosares is the founder of USAGOLD and the
author of "The ABCs
of Gold Investing - How To Protect and Build Your Wealth With Gold." He
has over forty years experience in the physical gold business. He is also the
editor of Review &
Outlook, the firm's newsletter which is offered free of charge
and specializes in issues and opinion of importance to owners of gold coins
and bullion. If you would like to register for an e-mail alert when the next
issue is published, please visit this link.
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