A week ago, China dropped a bombshell on the gold markets. It announced that it has boosted its gold reserves by more than 76% over the last six years. It now holds 1054 tonnes of gold.
But this is just the beginning of a much bigger move into gold by the Asian powerhouse. One that will send the price of gold sharply higher in the years ahead.
The really fascinating thing is that they’ve kept this build-up of gold secret until now. Now China’s secret is out, you have a real chance to make some good money from gold.
China enters the big league through the back door
China now has the world’s fifth-biggest reserves ahead of countries like Switzerland and Japan. But gold is still just a tiny proportion of China’s total foreign reserves – about 2%. That is a much lower proportion than most other major economies.
Now there are very clear signs that China plans a massive increase in its gold reserves over the next few years. Let me explain…
The vice general secretary of the China Gold Association, Hou Huimin, has said China should build its reserves to 5,000 tonnes. "It's not a matter of a few hundred, or 1,000 tons. China should hold more because of its new international status, and because of the financial crisis," he says.
Adding another 4000 tonnes of gold to its reserves would cost $114 billion at current prices. That’s just under 6% of China’s total foreign reserves right now. So that would still be low by international standards. And China can easily afford it. China’s gold reserves look set to keep rising.
So far though, China’s gold build-up hasn’t had a massive impact on the international gold price. And that’s because almost all of its new reserves have been sourced from local gold producers. China is actually the world’s biggest gold producer. So it hasn’t had to buy on the international markets. By secretly buying locally-produced gold, China minimised the impact of its buying spree on the international gold price.
But if China plans to increase its gold reserves as I believe it will then it is going to have to start buying gold on the international markets. And that will drive the price of gold sharply higher.
Buying gold to beat the dollar
The big question here is why exactly has China chosen to reveal the build-up of its gold reserves right now? After all, they didn’t say a word about it for the last six years.
Well, think back to just a few weeks ago when China was calling for the replacement of the US dollar as the world’s reserve currency. That sent a shockwave through the financial industry just ahead of the G20 summit. And now this.
What is China’s game?
You see, China’s leaders are rapidly losing faith in the long-term value of the dollar. And they are looking at alternatives to invest in.
The conventional wisdom is that China can’t stop investing in US debt because if they did the dollar would start losing value. That would wipe billions off the value of China’s existing US investments. So the idea was that the US had China by the throat.
Well the conventional wisdom is flat wrong. China does have a clear alternative – gold. Because it rises in value as the dollar declines. So part of it is just good economics.
But there is more to it than that...
Gold is a vital part of China’s global power play
China isn’t just preparing for the day that US dollar loses its status as the world’s reserve currency – they’re helping to make it happen. Moving into gold is also part of China’s strategy of increasing its global influence….
You see, every superpower needs a currency with international credibility. Sterling was the currency of choice in the heyday of the Empire. And the US dollar has been top dog in international trade for the last six decades.
China now wants to join the league of genuine superpowers. So it is working to position its currency, the yuan, as a major force in global trade. It means that China and its trading partners won’t have to rely on the US currency when doing business anymore.
China has a unique opportunity here to knock the dollar off its perch. The world has become increasingly sceptical about the value of a US dollar backed only by the promises of the US government.
So China is now working to make the yuan the gold standard of international currencies – literally. But to make that happen China will have to make massive additions to its gold reserves.
The consequences of that for the dollar are going to be damning. But it is going to be brilliant for gold investors. If you do not already have some exposure to gold in your portfolio, now would be a good time to consider it.
Just to let you know, there will be no issue of The Right Side on Monday. Enjoy your Bank Holiday weekend.
Manraaj Singh
For The Right Side
Editor’s note: Manraaj Singh is the Chief Investment Strategist for the Profit Hunter service. As well as recommending undervalued investments in under-researched global markets, he is also currently investing in commodities such as oil and sugar and is on the hunt for an exciting way to play the coming bull market it gold. Click here to join him
MARKET NOTES
China’s ferocious appetite for gold puts it in the top five list
BY SHIVVY ARORA
As Manraaj explained above, ‘gold is a vital part of China’s global power play’.
It’s now official – among nations that reveal their gold holdings, China is the fifth-largest holder in the world.
You can see it on the chart below. With 1,054 metric tons, China is now just ahead of Switzerland in terms of how much gold it owns.
China’s hoarding gold
Now that its stockpiling of gold isn’t just a rumour, we expect Chinese buying of the precious metal to be on the rise.
Consider that China holds nearly half of its foreign currency reserves in US dollars. And it’s desperate to reduce that. Like the rest of us, the Chinese have been watching US government spending balloon. They question America’s ability to honour its debts. No wonder they’re aggressively boosting gold holdings.
The International Monetary Fund is poised to sell approx. $12 billion of its gold this year. And we think it’s very likely that China will be a significant buyer.
The Daily Reckoning – An Even Greater Depression
By BILL BONNER
London, England
Friday, 1 May 2009
Today is a holiday in much of the world. But not in London. For some reason, the English are celebrating 1 May on 4 May. Go figure.
Here at the Daily Reckoning headquarters, however, we keep our eyes open 24/7 – well, unless we are on vacation... or sleeping... or having dinner... or have something better to do.
What we’ve been watching is a bear market rally. Stocks have bounced... and with them good news is beginning to appear. Commentators keep saying that “maybe the worst is behind us.” Analysts keep claiming they see “signs of a recovery.” Economists think the results are “better than expected.”
All over the world, people are breathing a sigh of relief. The end of the world did not come. Asian economies are still growing. Even with GDP falling at a 6% annual rate in the USA, unemployment seems to be moderating... and house prices are falling not quite as fast as they were a few months ago.
Yesterday, the Dow fell 17 points. Oil traded at $51. The dollar dipped a bit – to trade at $1.32 per euro. And gold gave up $9 – ending the day at $891.
Hallelujah! Things seem to be coming back to ‘normal.’ No more 500-point drops in the Dow. No more oil at $149. No more nerve-shattering bankruptcies.
We will consider whether it is time to stand down or not in future Daily Reckonings. Today, we pause briefly to consider what it cost.
In the news this week, the headlines were dominated by the Swine Flu. Each day, the death count mounted. Each day, new cases were reported in new places. And each day, the world seemed to come closer to a pandemic that would take millions of walking, talking homo sapiens and lay them silently under the ground. Almost every day, we were reminded of how much damage the last big pandemic – 1918-1921 – did. Thirty to fifty million was its toll, we were told... along with the additional warning that “major epidemics seem to strike every hundred years or so.” Even math-challenged Americans could figure out that their time might have come...
Included in the panicky chatter were announcements, warnings, and provocations from the various health authorities. The ‘alert level’ was raised to 5 (on a six-point scale)... travellers’ advisories were posted... the World Health Organization pestered member states to beef up their stocks of vaccines and to put in place preventive measures. “Wash your hands,” said one doctor. “Cover your nose and mouth with a mask,” said another. “Run for the hills,” said a joker.
The actual price in lives has been very, very modest. Thousands of people die from flu and colds every year. Still, people go about their business. They sneeze on the subway, they accept change from vendors in bare hands, they sit next to coughing passengers on airplanes. Life goes on.
But this new strain of flu spooked them badly. They feared it might be like the plague... a curse from the gods that could exterminate millions for their wicked ways. Humanity itself seemed at risk.
Yet, in response to the threat of extermination, the Obama government has proposed to spend $1.5 billion. By our calculations, that is approximately .0001% of the amount the feds are spending to fight capitalism’s correction. Why is the threat of death less disagreeable than the threat of letting capitalism do her work? We don’t know.
The feds may be reluctant to spend on the Swine Flu because they are unsure about how bad it will be... and unsure how much they can do to prevent it. But couldn’t the same thing be said of the swinish financial correction? Of course it could. The feds have no idea what they are doing. All they have is a crack-pot theory... and some guesses. And yet... on the basis of these fantasies... they are spending an amount equal to the nation’s entire annual output.
Read on…
To read the Daily Reckoning in full, click here.
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