I know. I am using the term “black swan” very loosely and I agree.
According to Nassim Taleb to be a black swan event, it should be rare, have
extreme impact and have retrospective predictability (though not
prospective). However, I think China could shock the world when it announces
its gold reserves. Something tells me it will have the same effect as the
unpegging of the Swiss franc. Many called, also loosely, the unpegging of the
Swiss franc a “black swan” event. Economists will come this time again with
their statistical probability studies to show that it was a 35 standard
deviation event and that such an event is likely about once every 140,000
years. I think any amount above 8,000 tonnes will be a shock in the central
bank community and the gold market. Why is China accumulating so much gold?
Why is China encouraging its citizens so hard to buy gold?
Being born and gone to school in a totalitarian communist country I know
this massive gold buying by China is not a coincidence nor a free market
choice. The images of a gold and jade statue of Mao Tse-tung worth more than
$15 million in Shenzhen has an underlying message. It is the same as the
picture of Vladimir Putin holding a 400oz gold bar in his hand. China is
maybe not as totalitarian as it was during Mao’s reign but it still is very
authoritarian. Nothing is permitted or as in the case of gold buying approved
and encouraged by the powers in place without clear approval from the top.
“Gold has always been, through the history of China, a way to project power,”
says Kenneth Hoffman, a metals and mining analyst at Bloomberg
Intelligence and I agree.
“Whoever has the most gold is able to control gold’s valuation.
Controlling gold’s valuation, you can control the valuation of all other
currencies,” and “The more gold China has, the less it’s under the thumb of
the United States. China has got all of its foreign exchange in U.S.
government bonds that could be repudiated in a minute,” says Chris Powell of the Gold Anti-Trust Action Committee
(GATA). China realized this a long time ago and has been doing everything to
buy gold and as much as possible.
In the Gold Forecaster
of April 2014, Julian D.W. Phillips writes, “China is not only the main force
in the global gold market, but they control the gold market.
… They play their control very cleverly so that it is not apparent… They have
found a way to buy gold without pushing up the gold price.” According to Reuters
“China plans to launch a yuan-denominated gold fix this year to be set
through trading on an exchange…, as the world's second-biggest bullion
consumer seeks to gain more say over the pricing of the precious metal.” This
will certainly increase China’s control on the gold price.
China has confirmed it has asked the International Monetary Fund (IMF)
managing director, Christine Lagarde, during her recent visit to China to
include China's yuan in the Special
Drawing Rights (SDR) basket.
Chinese Vice Premier Li Keqiang meets with International Monetary Fund
managing director Christine Lagarde
China also has been signing trade deals all over the world in the last
year at a very fast pace and at the beginning of this year it has made
official and public its intention to make the yuan a world currency. It
caught many in the currency markets by surprise but not me.
The incredible success of the Asian Infrastructure Investment Bank (AIIB) was
also a surprise and a major defeat for the US. Recently also China, through
one of its banks (Bank of China), started to advertise internationally the
use of the yuan. Look at an advertising billboard bellow of Bank of China in
Thailand (figure #1). Note the coin is clearly a gold one and the message:
“RMB [yuan] The World Currency”. This appeared a few weeks just before the
announcement that China has requested the yuan to be included in the SDR.
Bank of China advertising billboard in Thailand
China officials talk frequently of gold as money and of considering gold
as an asset to back their currency in one form or another. Sun Zhaoxue,
president of both the China National Gold Corp. and the China Gold
Association said in an article that, “Individual investment demand is an
important component of China’s gold reserve system; we should encourage
individual investment demand for gold. Practice shows that gold possession by
citizens is an effective supplement to national reserves and is very
important to national security.”(1) He also said, “Increasing gold
reserves should become a central pillar in our country’s development
strategy. International experience shows that a country requires 10% of
foreign reserves in gold to ensure financial stability, while achieving high
economic growth concurrently.” (1) Kenneth W. Hoffman, senior
analyst in metals and mining at Bloomberg Industries, says that, “based on
conversations with officials in China and Mongolia, it’s evident that China
feels they want as much gold as the U.S.”
There is a game that the Chinese play, it is called Weiqi, and it is
similar to chess. In Weiqi, you have to surround your enemy slowly and lay a
trap, and then close the trap all at once. That is the way the Chinese think.
They don’t really disclose what their plan is; they just move tiny pieces
around the board in a seemingly incoherent way, but when all the pieces are
lined up that’s when the trap is sprung. All of the government party leaders
play this game, and the CEO’s and chairman of China’s largest businesses are
all part of the party. If you observe China’s actions in the last 5 years you
can clearly see this game strategy being implemented.
Weiqi
According to Willem Middelkoop, in his book The Big Reset, as
early as 2009 a ‘task force’ team of monetary experts had suggested that
China’s gold reserves should be increased to 6,000 tonnes by around 2013 and
to 10,000 tonnes by around 2017. 6,000 tonnes would “put the Chinese on a par
with the US and Europe on a gold-to-GDP ratio”.
Song Xin, Party Secretary and President of the China Gold Association,
wrote at Sina Finance on July 30, 2014 “in order for gold to
fulfill its destined mission, we must raise our gold holdings a great deal,
and do so with a solid plan. Step one should take us to the 4,000 tonnes
mark, more than Germany and become number two in the world, next, we should
increase step by step towards 8,500 tonnes, more than the US”. Therefore, a
reasonable speculation, but still a speculation, would be that China has
around 4,000 and 6,000 tonnes of gold in its possession already.
China understands the old saying that “He who owns the gold makes the
rules.” In his book, The Big Reset, Willem Middelkoop says, “They
[Chinese] know, even from their own history, that gold has been used time and
again to rebuild faith when a fiat money system has reached its endgame.”
People’s Bank of China’s Zhang Jianhua said, in an interview, “No asset is
safe now. The only choice to hedge risks is to hold hard currency – gold.”(1)
Sun Zhaoxue also said in an article that, “Currently, there are more and more
people recognizing that the “gold is useless” story contains too many lies.
Gold now suffers from a ‘smokescreen’ designed by the US, which stores 74% of
global official gold reserves, to put down other currencies and maintain the
US dollar hegemony.”(1)
Chart #1: World Gold Reserves – Top 20 Holders
If we look at the next chart, we cannot not be impressed by the rapid
accumulation of gold by China, wonder how much went into private ownership,
and how much is directly under the control of the People's Bank of China
(PBOC) as official reserves.
Chart #2: Chinese Gold Production Plus Net Imports
What can we conclude from the recent official request by China to include
the yuan into the SDR basket? Can we consider that an announcement of the
most recent China gold reserves will be made before the inclusion of the yuan
into the SDR? If yes than an announcement by the end of the year is almost
certain. If the yuan were to be included into the SDR, China would have to
show the composition of its foreign exchange reserves. That implies also to
furnish detailed information about its official gold holdings.
In the next three charts I have showed the official gold reserves of the
G7, BRICS and two small but special countries, one developed, Switzerland and
one developing, Lebanon. Both have a very unusual gold portion of their
foreign exchange reserves. I also included two hypothetical scenarios for
China since the official figure of 1,054.1 tonnes has not been updated since
2009 and is unrealistic. The first scenario is that China will announce 4,000
tonnes of gold reserves and the second scenario is an announcement of 8,500
tonnes. As you can see to join the majors, US and Euro Area, China needs at
least 4,000 tonnes (Germany has 3,384.2 tonnes) but I prefer to look at
Germany as part of the Euro Zone).
Chart #3: Official Gold Reserves in Tonnes
If we look at gold as a percentage of foreign exchange reserves, at 4,000
tonnes China is still far from the majors, Euro Area and US. With 8,500
tonnes, China’s gold will represent only 8.9% while the US and Euro Area
70.9% and 55% respectively. Even Russia already has 10.2%.
Chart #4: Gold as a Percentage of Total Foreign Exchange Reserves
Now, if we look at the gold reserves as a percentage of gross domestic
product (GDP) then at 8,500 tonnes China would be higher than the US’s 1.8%
but less than the Euro Area’s 3.2%. On the other hand, with just 4,000
tonnes, it will be close to the US’s 1.8% but still lower.
Chart #5: Official Gold Reserves as a Percentage of GDP
It is evident that any announcement of 8,000 tonnes of gold or more would
create a shock in the gold market but also in the central bank community.
This will be what I call loosely a “black swan” event. It will start a run on
gold by other central banks as it happened when France repatriated all its
gold in 1970 and was followed by many other countries forcing US President
Nixon to close the gold window. I do not expect such a shock, if the
announcement is only between 4,000 and 6,000 tonnes since it is already
widely accepted in the market. However, I would not be surprised if besides
this 4,000 to 6,000 tonnes, China also has access indirectly to another 2,000
to 4,000 tonnes already.
Bibliography:
1.
The Big Reset, Willem Middelkoop
Charts:
2.
Nick Laird, www.sharelynx.com
