What You Need to Know About China’s Gold
For you stock-market buffs, here’s a blast from the past: “Plunge Protection Team.”
You remember those guys? That’s the catchy nickname for a presidential group of officially sanctioned market manipulators who sprung out of Wall Street’s 1987 crash, and who have been pulling strings and pushing levers behind the scenes ever since to keep the markets from collapsing.
Well, I’m not sure how to say “plunge protection team” in Chinese, but last week’s news makes it clear China has one.
China released its latest data on the amount of gold its central bank is holding. The number was a shocking lie. And what seems clear in this lie is that China only released the data for one reason: to stanch the bloodshed in its stock market.
I will tell you right now that if there’s one investment you make this year, it should be gold.
At just over $1,100 per ounce as I write this, gold prices are at the lowest levels since 2010. The latest move down stems from China’s Big Golden Lie…
The country announced last Friday that its official gold holdings now stand at 1,658 tons. That’s just 600 tons more than the country supposedly owned in 2009.
It’s a lie as big as the country itself.
China now mines more gold than any other country. It has mined more than 2,000 tons of gold since 2009. Much — if not all — of that gold ends up in the People’s Bank of China.
And depending on the month, the country is also the No. 1 or No. 2 gold importer. It has imported well over 3,300 tons of gold through Hong Kong. China has also imported nearly 700 tons from Switzerland since January 2012.
And yet the country’s official gold holdings increase by just 600 tons?
The math seems askew…
And Then There’s This Little Tidbit
Just last month, at the London Bullion Market Forum 2014, the chairman and secretary-general of the China Gold Association announced what should have been shocking news. It proves everything I’ve been saying for last few years about the massive size of China’s gold hoard.
Mr. Zhang’s first slide showed that “Since 2009, Chinese gold reserves keep increasing. Successfully breakthrough 7,000 ton, 8,000 ton, 9,000 ton. Till the end of 2014, the gold reserves reach 9,816.03 ton, the world’s second.” (That’s where he ended it, presumably meaning the world’s second-largest hoard of gold.)
I’ve been saying that based on known flows of gold, China has at least 5,000 tons and possibly closer to 10,000 tons. And here’s the head of the country’s gold association confirming my calculations and suspicions.
And yet the country officially announced just a 600-ton increase that leaves the total hoard six times smaller than what the country’s gold association says China really has.
Plunge Protection Team to the rescue!
A Secret Hedge Against a Dollar Disaster
During the recent Shanghai Stock Exchange implosion, there was an internal call for the government to shore up investor worries, not with empty words but with real action. One of those actions was to increase gold and silver reserves, to show that China’s financial system is stable.
Showing an increase in gold would help that cause.
At the same time, the International Monetary Fund (IMF), which wants to add the yuan to a basket of reserve currencies, has been calling on China to update its accounting of its gold reserves, since that figure was last updated six years ago. Again, the latest announcement helps that cause.
But it doesn’t address the lie.
Why would China so drastically under-report it’s gold?
Two plausible scenarios I can think of:
- China doesn’t want to unsettle the global currency market by announcing how truly large its gold holdings are. That would call into question the value of U.S. dollars and could be seen as an attack on the dollar. China isn’t ready — yet — to rule the roost.
- China is preparing for a crisis of confidence in Western currencies, namely the dollar. And it is building a massive store of gold to fend off — and profit from — the storms to come. In a global currency crisis, gold would rise to between $3,000 and $5,000 an ounce, possibly more. The value of China’s gold holdings — its real gold holdings — would recoup any losses accumulated in U.S. Treasury debt the country owns.
The Best Insurance Policy
This is the moment to be building your own hoard of gold. Prices are at five-year lows, yet nothing in the world has changed since the end of the global financial crisis.
Indeed, as I will show you Friday, far from deleveraging in the wake of the financial crisis, the world has actually taken on substantially more debt.
This is not a sustainable path.
And payback, as they say, is gonna be a bitch.
Buy gold. And as I always say, buy it often. It’s your only salvation when the reckoning comes.
Until next time, stay Sovereign…
Jeff D. Opdyke
Editor, Profit Seeker