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Insights On The Way China Thinks About Gold

Author, Editor, Founder, and Executive Director @ USAGold.com
October 31, 2013

As Chief Market Strategist for Anglo Far East, the precious metals logistics and custodial services company, Alex Stanczyk travels frequently to China and has extensive knowledge and experience about its attitude towards gold. In the following snippet from a longer interview at the Koos Jansen website, he discusses China’s gold strategy and what it might mean for the market in the months and years to come. The interview took place in early September, 2013, and it is reprinted here with permission.

China has imported an unprecedented amount of gold bullion in 2013. So much so, that if it were to maintain the current pace, it would import nearly the equivalent of global production for the year. When the news first filtered out of China on the amounts of gold being mobilized through its Shanghai Gold Exchange, the numbers seemed too large to be believed. The obvious question became “What is the source of this extraordinary amount of gold bullion?” It was only in October when Reuters reported that much of that gold had been shipped from London-based exchange traded funds to Switzerland for refining into smaller Asia-friendly bars and then on to Hong Kong and Shanghai that the full picture came into focus and the extraordinary numbers gained credibility.

This issue of Review & Outlook is based on a series of posts I made at the USAGOLD blog over the course of the past month. It details how the China gold trade mechanism works, the reasons for it, and why China’s interest in gold is likely to remain of paramount importance to the global market for many years to come. I have updated the original statistics from recently posted reports at the Koos Jansen website based in the Netherlands — a research source specializing in the China gold trade. To stay abreast of the China situation as well as other developments in the gold market, I invite you to visit this page regularly.

You can access the November issue of Review & Outlook here ( https://www.gold-eagle.com/article/china%E2%80%99s-london-zurich-hong-kong-gold-conduit-%E2%80%94-major-financial-coup-d%E2%80%99etat ). In the left column, you will find a sign-up link if you would like to receive an e-mail alert whenever we post an update.

[Start quote - Alex Stanczyk, Anglo Far East]

“I might have a small advantage over some other gold commentators. I have been invited to China on several occasions to speak. One of those occasions was to speak to the Chinese government – it was a think tank on monetary policy. I know China is ramping up its gold reserves massively during this period of time. I think their likely importing way more than the figures you and I see show.

…Our firm has got personal experience dealing with the guys that transport the gold, the security companies. One of our partners had lunch in the recent past with the head of the largest global operations company in security transport. He said there is a lot of gold that they’re moving into China that’s not going through exchanges. If the gold is for the government they don’t have to declare where it’s going. They don’t have to declare where it’s going in, or where it’s heading. If you look at the way the Chinese do things, why would they tell?

…We talked to the head of the largest refinery in Switzerland and he told us directly that all that metal that’s coming out of London (904 tons YTD) is being refined into kilo bars and sent to China, as well as metal that’s coming in from other areas in the world, that’s all going to China. It’s way more than is being reported or moved through the exchanges. All the kilo bars go to the Chinese people but the PBOC is likely only buying good delivery.

…The Chinese government is encouraging the people to buy gold for three reasons:

…Number one, it soaks up capital that would otherwise flow into bubble markets like real estate and equities.

…Number two, gold provides a strong base in case of inflation or other economic chaos. This provides stability and lowers the chances for civil unrest if there are economic problems.

…Number three, if the people would sell it back, it gives the PBOC [Peoples Bank of China, its central bank] a way to increase its reserves by stealth. Remember the PBOC is very secretive about their gold reserves. It buys a huge amount of gold off books using proxies, so it can keep it reserve numbers hidden. This is very Chinese if you understand the Chinese mindset. The next time they will report on their reserves it will be 3000 tons, probably higher.

…There is this game that the Chinese play, it’s called Weiqi (pronounced Way Chee), and it’s similar to chess. In Weiqi you have to surround your enemy slowly and lay a trap, and than close the trap all at once. That’s 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.

…I have spoken to a highly placed member of CSRC [China Securities Regulatory Commission] and he told me directly that the government’s purpose over the next five year plan is to curb real estate and equities investment and get more people investing in gold.

…If you see the massive demand that’s going over to Asia it’s really staggering. Year to date 1800 tons was imported into India and China, out of an annual mine supply of 2700 tons. It’s a massive imbalance, this never happened before.

…I think we have passed the [gold market] bottom. The fundamentals for the reasons it started going up in the first place never changed; the sovereign debt and the amount of money supply increase. Gold is only measuring the devaluation of paper currencies. This trend is been going on for many years and I don’t see it changing because the governments of the world don’t have solutions to the problems that they’ve got.

(End Quote)

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Michael J. Kosares

Founder – USAGOLD

Author – The ABCs of Gold Investing: How To Protect and Build Your Wealth With Gold

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Michael J. Kosares has over 40 years’ experience in the gold business. He is the founder and executive director of USAGOLD (both the website and gold brokerage service), the author of three books on the gold market, and the editor of "News, Commentary & Analysis," the firm's client letter. He has written numerous magazine and internet essays and is well-known for his ongoing commentary on the gold market and its economic, political and financial underpinnings. 


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