In case anyone was wondering what the Chinese government is up to, this is exactly how China plans to send the price of gold skyrocketing.
China Continues Its Massive Accumulation Of Gold:
Stephen Leeb: “At the moment, a stack of about 25 recently published books teeters on the floor next to my desk. They’re all about China: its rise, its economy, its plans for the Silk Road. And not one of them talks about gold. This happens to be very good news for me, since I’m proposing to write a book about China and gold, and prospective publishers want to know I haven’t been beaten to the punch.
But more relevant to gold’s prospects, it also shows how craftily the Chinese mask their ambitions, in line with Sun Tzu’s “The Art of War” and more recently Deng Xiaoping. Echoing Sun Tzu, Deng said China must “observe developments soberly, maintain our position, meet challenges calmly, hide our capacities and bide our time…never claim leadership.”
That quote appeared in one of those books by my desk, “When China Rules the World,” by the well-respected and extremely knowledgeable Martin Jacques. It’s an informative, well-researched book that didn’t mention gold once in its more than 500 pages – ironic given that China is now following Deng’s advice brilliantly with respect to its plans for the metal…
China’s 11,000+ Tonnes Of Gold:
China has been carefully concealing its appetite for gold so that it can continue to accumulate it in large quantities without prematurely impacting its price. This has led putatively authoritative sources like the World Gold Council and GFMS, a division of Reuters, to dramatically underestimate China’s gold activities.
Since 2013, China has been accumulating gold at a clip of more than 2,000 tonnes a year. That translates into 11,000 tonnes by the end of 2017 – and doesn’t even take into account that monetary gold can be imported into China in any quantity without being reported.
In fact, China could easily be buying monetary gold from foreign miners directly, perhaps even paying a small premium. A particular mine would be just a bit more profitable than expected, and no one would be the wiser.
And so it goes. Whether you are talking about North Korea, the amassing of gold, or a new monetary system, China’s leaders are unrivaled experts at keeping things close to their chest as they bide their time.
So how let’s look at a more accurate picture. For starters, China’s in-ground gold reserves are estimated at about 2,000 tonnes. Last year China mined approximately 23 percent of its reserves, or 455 tonnes, an extraordinary number that made China, for the eighth year in a row, the world’s largest gold producer. And when I say extraordinary, I mean it: It’s the largest percentage of reserves of any metal or commodity mined by any country in history. Last year, all other gold-producing countries together mined less than 5 percent of their reserves.
While China is rich in many resources and a leading supplier of critical resources to many countries including the U.S., nothing compares to the intensity of its gold mining. Even silver, a monetary cousin of gold and a vital industrial metal, is mined far less aggressively, with approximately 9 percent of reserves mined last year, leaving China in third place.
Keep in mind that mining such a large percentage of your resources means you’re almost surely losing money. No gold company in its right mind comes close to mining the proportion of reserves that China does.
Barrick, for example, with the industry’s largest reserve base, mined about 7 percent of its reserves last year, clearly the maximum this exceptionally managed company felt it could mine without cannibalizing future growth. Mining more than three times as much – the equivalent of what China was doing – probably would have ruined the company because of huge capital expenditures and massive increases in costs.
Clearly China is seeking to suck up every ounce of gold it can. And if it’s willing to mine its own gold at a rate that makes no short-term economic sense, it would be utterly implausible to think it’s not also accumulating all that it can from abroad, at a lower cost, from miners that – unlike China – don’t know just how valuable their gold will become.
China Acting Secretively Because Of Fears Of Skyrocketing Gold:
China knows if it let on how aggressively it is accumulating gold, gold’s price would skyrocket, short-circuiting its plans to amass even more in anticipation of linking gold and the yuan in a new monetary system. So it’s not surprising that little is known about the Chinese gold mining industry. The biggest miner is state-owned China National Gold Group Corporation (CNGGC), which controls the one publicly traded company, Zhongji Gold. Remarkably Zhongji was cash-positive last year, which I’d take as the equivalent of a money manager naming only his three best-performing stocks, ignoring all others, to illustrate his performance.
On May 18, Bloomberg published an article titled “China’s Big Derivatives Push Aims at Global Pricing Power.” It notes that China is the largest consumer of commodities and natural resources yet mostly depends on dollar-denominated foreign markets for the prices they pay. Bloomberg echoes what I recently pointed out in a KWN interview: that after postponing plans to trade oil in yuan, China has done an about face and now plans to proceed with an oil contract.
I think this time the Chinese will follow through. As the Bloomberg article notes, one problem China has faced in attracting foreigners to their market is that its currency is still largely controlled and thus can’t be hedged. Nowhere does the article mention gold, not even when talking about commodities and minerals that are traded in yuan, a category that includes gold.
A yuan backed or even partially backed by gold is a completely different animal from the yuan by itself. Once linked to gold, the yuan becomes the world’s safest currency. And China will have taken a major step toward a new monetary system in which the yuan is the natural currency of choice on the Silk Road. Already, as I said recently, Silk Road trading is carried out via a hodgepodge of participating countries’ currencies plus some gold, some yuan, and some dollars. Clearly a single currency would further the goal of tying together the East. And China, by virtue of its size and gold holdings, will be the hegemony in that knit-together East.
[ Commerzbank added that China’s silver imports also rose in March. According to data from the customs authorities, Chinese silver imports soared by 42% year-on-year to 357 tons. At 948 tons, first-quarter silver imports were the highest in six years. Scrapregister ]
The Key Signal To Back Up The Truck On Gold:
- Don’t expect to wake up tomorrow to read that the yuan/gold has supplanted the dollar as the world’s reserve currency.
- It will take a while to get there. But small steps already have been taken and bigger ones lie ahead.
- Oil traded in yuan would be one of them.
- Even bigger will be gold entering the equation, even as only partial backing for the yuan.
- And bigger still will be China finally finding it the right moment to reveal its true gold holdings, which almost surely will exceed 10,000 tonnes — quite possibly by a lot.
- We may not know the full truth for a long time, which only means that it may take a few years for gold to reach five digits.
- Be glad, because it means you still have time to get aboard and become filthy rich.
- So if, as I still think likely, gold comes down a bit from current levels, don’t get shaken out.
- And once a key signal is flashed – an oil benchmark traded in yuan – it will be time to back up every truck you can find and fill it with gold.
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