The Extent Of China's Lore, Lure And Love Of Gold
(Part II)
Tsung Ming Houtzu
The following is a collection of articles and news I have collected from the Internet, which will help the West to learn about The Extent of China's Lore, Lure And Love of Gold.
Monumental ramifications of China's necessity to buy gold to diversity foreign reserves
The news I posted earlier (seen again below) has been aired a number of times and from various sources in past weeks. This is testament to the validity and timeliness of the news. But no one has really delineated the monumental ramifications of China's necessity to buy gold to diversity foreign reserves. Consequently, I took a close look at the pertinent numbers. To appreciate my findings it is necessary to show the following basic data:
- China has $1 Trillion in foreign reserves, which grow continuously by the hour (in numbers that is
$1,000,000,000,000). About 70% of these reserves are concentrated in the US Dollar ($700 Billion).
- China's gold as a percent of total foreign reserves is about 1%....and it is reported China plans to increase the gold percentage by an additional 4% to a 5% goal.
- There are approximately 34,000 troy oz in a tonne
- Total annual gold production in the entire world is a mere 2500 tonnes
To increase gold reserves by 4% China needs to buy
$40 Billion in gold on the open market. THIS IS NOT POSSIBLE WITHOUT CAUSING THE POG TO SKY-ROCKET. However, for the sake of this illustration, let's assume China could buy it all at a fixed price of $625/oz. In this event China would acquire approximately 64,000,000 oz, equivalent to 1882 tonnes.
Let's put this into perspective. 1882 tonnes represents 75% of the Total yearly gold production in the entire world (ie 2500 tonnes).
But as I previously mentioned THIS IS NOT POSSIBLE WITHOUT CAUSING THE POG TO SKY-ROCKET.
What is absolutely certain is that China must and is diversifying its foreign reserves out of the US Dollar and into other major world currencies, including gold. It is also well nigh certain that China has for sometime been secretly buying gold...and most certainly will continue to accumulate gold until is reaches its prudent target of 5%. However, we need to remember China's US dollar reserves will continue to mount DAILY as long as the US Trade Deficit is a reality. To be sure, the ONLY way for the US Trade Deficit to reverse is to sharply devaluate the greenback, which would propel the POG into orbit....that much faster.
Summation of the Monumental ramifications of China's necessity to buy gold:
- Indubitably, the rising POG in recent history is in part due to China's covert gold purchases. Moreover, China's gold purchases will continue unabated for years to come, during which in my opinion the POG may reach US$1200 to US$1500/oz.
- Any respite in the rising POG is an opportunity to buy more before the price surges even faster and higher.
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Recent news from China
BEIJING -- China should take steps to diversify its holdings of reserves out of low-yielding U.S. treasuries and into other currencies as well as long-term strategic assets, economists said in remarks published Friday.
As China's foreign exchange reserves have grown past $1 trillion, a vigorous debate has emerged among domestic economists on the appropriate management of the funds.
Qin Chijiang, a professor at the Central University of Finance and Economics in Beijing, said Beijing should use its foreign exchange to make long-term investments in industry and finance to achieve higher returns, according to the central bank-backed Financial News. He added China could also use foreign exchange reserves to boost its natural resource and technology stockpiles.
"All central banks are trying to diversify...we have had a very clear diversification plan for several years," Chinese central bank Governor Zhou Xiaochuan said Thursday in Frankfurt, according to a Reuters report. Zhou said that the central bank is considering lots of instruments of diversification, according to the Reuters report.
The report sent the U.S. dollar sharply lower versus the euro in trading Thursday on concerns China would move out of dollar assets. Economists believe Chinese demand for U.S. debt has been a major factor in keeping U.S. interest rates low.
Peking University researcher Dou Erxiang, in the Financial News article, was cited as saying China needs to build a new management system for its foreign exchange reserves to independently manage the funds in a more market-oriented way.
Dou added China should diversify away from U.S. dollar assets and should moderately increase its holdings of euro and non-dollar assets.
Earlier this week, Chinese State Television reported that the country's foreign exchange reserves had hit the $1 trillion mark. China surpassed Japan earlier this year as the world's biggest holder of foreign exchange reserves.
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China Should Diversify Reserves, Buy L/T Assets-Economists
http://www.nasdaq.com/aspxcontent/NewsStory.aspx?cpath=20061109%5cACQDJON200611092239
DOWJONESDJONLINE001337.htm&
BEIJING -(Dow Jones)- China should take steps to diversify its holdings of reserves out of low-yielding U.S. treasuries and into other currencies as well as long-term strategic assets, economists said in remarks published Friday.
As China's foreign exchange reserves have grown past $1 trillion, a vigorous debate has emerged among domestic economists on the appropriate management of the funds.
Qin Chijiang, a professor at the Central University of Finance and Economics in Beijing, said Beijing should use its foreign exchange to make long-term investments in industry and finance to achieve higher returns, according to the central bank-backed Financial News. He added China could also use foreign exchange reserves to boost its natural resource and technology stockpiles.
"All central banks are trying to diversify...we have had a very clear diversification plan for several years," Chinese central bank Governor Zhou Xiaochuan said Thursday in Frankfurt, according to a Reuters report. Zhou said that the central bank is considering lots of instruments of diversification, according to the Reuters report.
The report sent the U.S. dollar sharply lower versus the euro in trading Thursday on concerns China would move out of dollar assets. Economists believe Chinese demand for U.S. debt has been a major factor in keeping U.S. interest rates low.
Peking University researcher Dou Erxiang, in the Financial News article, was cited as saying China needs to build a new management system for its foreign exchange reserves to independently manage the funds in a more market-oriented way.
Dou added China should diversify away from U.S. dollar assets and should moderately increase its holdings of euro and non-dollar assets.
Earlier this week, Chinese State Television reported that the country's foreign exchange reserves had hit the $1 trillion mark. China surpassed Japan earlier this year as the world's biggest holder of foreign exchange reserves.
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Beijing's FOREX diversification comments help bolster gold
Gold rose to a high of $636.50 a troy ounce yesterday following comments from the governor of China's central bank on the need for greater diversification of the country's $1,000bn foreign exchange reserves.
Rumours suggest China could build gold holdings to about 5 per cent of its FX reserves from the current estimate of 1 per cent.
http://www.ft.com/cms/s/840158e0-712a-11db-8e0b-0000779e2340.html
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China central banker urges reserve diversification
A leading Chinese central bank official said that countries around the world should gradually rely less on the U.S. dollar for trade and their foreign exchange reserves.
http://www.chinadaily.com.cn/china/2006-06/28/content_628079.htm
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Central Banker: Rely less on dollar
Countries around the world should gradually rely less on the dollar for trade and their foreign exchange reserves, a Chinese central bank official said.
http://www.chinadaily.com.cn/china/2006-06/28/content_627876.htm
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Call to mix FOREX reserves
China's bulging foreign-exchange reserves and massive holdings in US treasuries are prompting some economists and researchers to argue the nation should diversify part of its huge reserves into gold and oil.
http://www.chinadaily.com.cn/bizchina/2006-06/26/content_625911.htm
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Demand for Gold From China and India Expected to Continue -- Long-Term Outlook for Gold Remains Positive
http://www.marketwire.com/mw/release_html_b1?release_id=170424
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China's annual silver demand will hit 3000 tonnes by 2010
RENO, NV --The vice secretary-general of China's General Chamber of Commerce recently told silver experts that as the nation's economy develops, China's annual demand for silver will reach 3,000 tonnes by 2010. Current world mine supply is around 20,000 tonnes.
http://www.mineweb.net/int_beat/279951.htm
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China Hoard Theory...
In light of the new highs in the GFMS base metals index, it is a good time to recap for new readers the "China Hoard" theory. Jennifer Barry has an article up ("China Hoard Redux", posted at the Hemingway Table) revisiting the theory and showing how it has held up well for the last six months.
The China Hoard theory arose from a claim by Frank Veneroso that hedge funds were stockpiling excess commodities in Chinese warehouses to drive prices high. Jennifer and I initially proposed that the China was exiting its dollar reserves by purchasing, stockpiling, and in effect monetizing base metals. By hiding monetary demand in its huge commodity demand, China could slip out of the dollar into hard assets unnoticed by the world's watchers. Subsequent commentators (including Peter R, who named it succinctly, and MIDAS himself) helped develop the theory further. Since then, precious metals have been flattened and many shrewd commodity analysts have been wrong-footed by the unexpected base metal strength, but the China Hoard theory has held up.
It is important to remember that the Chinese want gold - but the gold market is so tiny, they cannot enter it without driving prices to the moon. For now, they fill warehouses with base metals, where their buying is less obvious. Eventually they will move into precious metals too, and we should see even greater moves there because the markets are more easily cornered.
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China and India to drive commodity boom
HONG KONG - China will continue to play a key role supporting the boom in commodity markets, while investors hope that Indian consumption adds fuel to the bull run, a portfolio manager for JPMorgan Asset Management said on Wednesday.
Ian Henderson, who manages a $2.5 billion (1.3 billion pound) resources fund, said the latest price falls in commodity markets are a short-term correction in a multi-year boom.
"China has been the biggest single factor. People will soon start having a hope on India," the London-based Henderson told Reuters in Hong Kong on the sidelines of a precious metals conference.
http://today.reuters.co.uk/news/articleinvesting.aspx?type=fundsNews&storyID=2006-10-11T100812Z_01_NOA136295_RTRUKOC_0_MINERALS-COMMODITY.xml
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Demand for Gold From China and India Expected to Continue -- Long-Term Outlook for Gold Remains Positive
http://www.marketwire.com/mw/release_html_b1?release_id=170424
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Chinese plans to diversify reserves into gold provides further support
There was further support in comments from Peoples Bank of China Governor Zhou Xiaochuan who said at a Frankfurt conference that China has very clear plans to diversify its currency reserves, which now stand at more than $1 trillion. A wide range of instruments are under consideration, including gold and oil.
In my view one may discard oil as a viable diversification alternative, as it is not considered a storage of value, but rather a commodity best suited for consumption rather than kept in inventory.
Needless to say The Peoples Bank of China has an almost limitless foreign reserves to purchase gold - as the Trade Surplus with the West grows relentlessly. Morevoer, China's teeming 1,300,000,000 populations has millennial cultural affinity to the yellow metal, which goes back 5,000 years. Whereas, China's per capita is a mere fraction of an American's, it nevertheless is growing at an accelerated rate....and given enough time will equal the West's per capita income.
Many believe the future price of gold will top US$1,500 in this decade. To be sure the Renminbi is strong, but gold is in the long run much stronger than all paper.
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CHINA DESPERATELY NEEDS MUCH GOLD
China Losing Taste for Debt From U.S.
http://www.nytimes.com/2009/01/08/business/worldbusiness/08yuan.html?_r=1&ref=business
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U.S. debt is losing its appeal in China...and therefore is buying gold
HONG KONG: China has bought more than $1 trillion in American debt, but as the global downturn has intensified, Beijing is starting to keep more of its money at home - a shift that could pose some challenges to the U.S. government in the near future but eventually may even produce salutary effects on the world economy.
At first glance, the declining Chinese appetite for U.S. debt - apparent in a series of hints from Chinese policy makers over the past two weeks, with official statistics due for release in the next few days - comes at an inopportune time. On Tuesday, the U.S. president-elect, Barack Obama, said Americans should get used to the prospect of "trillion-dollar deficits for years to come" as he seeks to finance an $800 billion economic stimulus package.
Normally, China would be the most avid taker of the debt required to pay for those deficits, mainly short-term Treasury securities. In the past five years, China has spent as much as one-seventh of its entire economic output on the purchase of foreign debt - largely U.S. Treasury bonds and American mortgage-backed securities.
But now, Beijing is seeking to pay for its own $600 billion economic stimulus - just as tax revenue falls sharply as the Chinese economy slows. Regulators have ordered banks to lend more money to small and midsize enterprises, many of which are struggling with slower exports, and Chinese bankers say they are being instructed to lend more to local governments to allow them to build new roads and other projects as part of the stimulus program.
"All the key drivers of China's Treasury purchases are disappearing," said Ben Simpfendorfer, an economist in the Hong Kong office of the Royal Bank of Scotland. "There's a waning appetite for dollars and a waning appetite for Treasuries. And that complicates the outlook for interest rates."
http://www.iht.com/articles/2009/01/07/business/yuan.php
One should also read the following, which force you to conclude China will be building up its gold reserves in exchange for the US dollar. IMHO this may drive the price of gold over $1,500/oz sometime this year.
CHINA'S central bank said yesterday that it plans to implement a pilot program that would settle overseas trade with the Chinese currency instead of the US dollar. http://tinyurl.com/8mlcc5
FURTHERMORE, the Peoples Bank of China (Central Bank) recently announced it is planning to buy 4,000 tonnes of gold to add to its Foreign Reserves (ie in exchange for US dollars). Indubitably, this will have a substantial and positive impact on the price of gold.
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China PBOC Mulls Raising Gold Reserve By 4,000 Tons - Report
BEIJING (Dow Jones)--China's central bank is considering raising its gold reserve by 4,000 metric tons from 600 tons to diversify risks brought by the country's huge foreign exchange reserves, the Guangzhou Daily reported, citing unnamed industry people in Hong Kong.
The Guangzhou-based newspaper didn't elaborate on the plan.
China's forex reserves, at US$1.9056 trillion at the end of September, is the world's largest. U.S. dollar-denominated assets, including U.S. treasury bonds and mortgage agency bonds, account for a big proportion of the FOREX reserves.
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CHINA CAN BUY ALL THE WORLD'S GOLD
http://www.commodityonline.com/news/China-overtakes-India-in-Gold-sales-14417-3-1.html
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China overtakes India in Gold sales
India has been until now, the undisputed single-largest Gold bullion consumer, with its own final demand outweighing the next largest market - China by almost 57 percent. But it seems now, that the Chinese Gold buyers have caught up during 2008.
http://www.commodityonline.com/news/China-overtakes-India-in-Gold-sales-14417-3-1.html
14 September 2009
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