China Gold - A Ruse By Any Other Name

by David EngstromJuly 22, 2015

In April of 2015, China was expected to reveal its gold reserves.   Six years had passed since China last reported (2009) and at that time six years had passed since its 2003 report. 

The April report was highly anticipated.  Finally, the cloak of secrecy that shrouds China’s true gold holdings would be lifted.  In so doing, it would reveal just how hotly demanded gold has actually been since the 2008 crisis struck and since the gold price peaked in 2011.  Since 2011, mainstream reports have suggested the crisis is over, the economy is recovering and gold has become irrelevant.  No one wants it anymore.

Insiders have been telling a much different story.  In this post-crisis era, debt is reaching destructive levels.  The debt crisis of 2008 was dealt with by issuing more debt, which even the media said was only kicking the can down the road.  One day the can would reach the end of the road and a crisis of magnum proportion would result.  Now the mainstream media is nearly silent on the issue.

To prepare, those who comment in the alternative media have been stressing the importance of owning gold to hedge against impending disaster.  Reports of massive gold hoarding by the one-percenters and central banks abound.  However, data to support that has been clouded.  By some accounts, gold inventories are disappearing.  The COMEX has seen inventories shrink while hundreds of tonnes of gold have gone missing from ETFs and large bank inventories.  Yet, because no one reported on the buy side, it has been accepted that gold can just vanish, being neither bought nor sold.

China’s reporting was expected to solve the mystery.  The truth about gold demand and dwindling supply would come to light, giving credibility to those who warn of another disaster and higher gold prices to come.  Some say the West has no more gold – China has it all.  It is expected that when China finally comes clean, these claims would be affirmed and gold prices will rise to meteoric new highs.

Instead, in April, China reported it had acquired no new gold reserves through the month of March, 2015.  On the inside, no one believed it.  Even the mainstream media hardly gave it a word and gold prices barely twitched.  If China did have more gold than it reported in April, it was believed they would have to come clean by October.  This is when China will seek reserve currency status by the IMF alongside the U.S. Dollar, the Euro and five other primary currencies.

According to Eswar Prasad, a professor of trade policy at Cornell University in Ithaca, “Reserve-currency status for the yuan would make central banks, particularly those in developing economies, more eager to hold yuan assets and “diversify at the margin away from dollars,” as well as euros, yen and Swiss francs.”

China has been very vocal in their belief the U.S. Dollar should be replaced as the world’s reserve currency.  How can you have faith in something that can be printed to service debt?  In order to show worthiness and gain acceptance by the IMF, China must demonstrate the Yuan is a strong addition to the basket of IMF reserve currencies.  It has been deemed the Chinese will prove the Yuan’s worthiness by backing it with Gold - and lots of it.

Bloomberg has estimated China’s holdings to be in the 3500 tonne range - if it actually comes clean in its report.  In large part, this is based on China’s own gold production reports.  In 2015 China will produce as much as 450 tonnes.  That amount being up 25% from 2011 levels.  Conservatively, that puts China’s gold production, since 2009, near 2000 tonnes.

Because China does not export its own gold, simple math suggests China indeed has in excess of 3000 tonnes of gold irrespective of any additional purchases.  Throw in a few hundred tons of previously reported missing gold and it is easy to see how China could have 3500 tons or more.    

In late 2014, Song Xin, President of the China Gold Association, recommended that China accumulate 8500 tonnes of gold in order to launch it ahead of the U.S. as the country with the highest reported gold reserves.  U.S. reserves are reported to be 8,133 tonnes.  Given China’s concerted effort, over the last decade or two, to acquire ownership in gold mines around the world, many believe China has achieved its 8500 tonne goal.

Then, in a conspicuous, unsolicited move, China just announced it had indeed increased its reported 1054 tonne gold reserve by some 600 tonnes.  Because it appeared China was making its long-anticipated report (finally coming clean) the mainstream latched onto this number and scattered it all over the airwaves.  Clearly, the number was far below what the insiders expected or believe.  Regardless, someone reportedly got nervous.

One headline claimed a major fund was suspected of selling $2.7 billion worth of gold on the news.  Headlines like this always amaze me.  Apparently no one suspected that anyone bought $2.7 billion worth. It seems investors forget there is no such thing as some “just sold.”  As far as I know, you can’t “just sell” without there being a buyer on the other side of the trade.  In other words, someone who believed China’s report sold to someone who didn’t.

I see it this way.  If you believed China when they said in April they had accumulated no additional gold in its reserves over the entire six years prior, you have to believe them now.  If you believe them now, then China just told us they accumulated 600 tonnes of gold in the last 2 months.  That should be bigger news than China accumulating 7000 tonnes of gold over the last 6 years. 

Zerohedge is of the opinion that China will continue to report increased holdings right up to the time of October when the IMF reviews the potential status of the Yuan as a recognized reserve currency.  Meanwhile, this Chinese ruse has created a buying opportunity we may never see again.  Surely, if China were looking to accumulate more gold in the months ahead it would revel in these lower prices.  The minute they really come clean, the insiders may be proven right and gold could rise to unprecedented highs.

It seems more and more people are not believing China has totally come clean.  The U.S. mint, this month, is on pace to sell two-thirds as much gold as they had the entire year January through June.  On the COMEX, in June, account holders took delivery of $355 million worth of physical gold.  This month, the Bank of Nova Scotia alone has already taken delivery of $69 million worth after taking delivery last month of $48 million.

Do you believe China?


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