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Guest Post: What The Heck Is Going On With China
Submitted by Doug Hornig, Casey's Gold & Resource Report
That’s a question that Westerners have been asking for, oh, several millennia now. Or at least since Marco Polo aimed his ponies down the old Silk Road in 1271.
Now as then, China keeps its own counsel. We know what they want us to know, plus what we can surmise from rumor and reading between the lines. But lately, we’ve been able to add presumption to news and come up with something that looks very significant.
Specifically, there’s been a flood of tantalizing stories out of the East that, taken together, strongly suggest a growing preoccupation with a form of money that was ancient even in Signor Polo’s time. And it ain’t silk. It’s gold.
We already learned, back in April, that China has been salting away bullion for the previous six years, out of sight of international gold watchers. To the tune of 14.6 million ounces. Now the evidence suggests that that was merely the prologue.
Let’s take these tidbits one at a time:
Sovereign wealth fund dumping $$ for gold? This one is still at the rumor stage, but highly-respected website Mineweb.com is supporting it. What we know for sure is that the country founded its primary sovereign wealth fund, China Investment Corporation (CIC), two years ago, with the stated aim of rapidly deploying some of its $1.5 trillion forex surpluses – $200 billion initially, with another $100 billion recently added to the kitty – into investment in non-Chinese enterprises. This it has been doing in spades, acquiring businesses around the globe. Extractive industries are among them, including Teck Corp., the diversified Canadian mining giant.
Might it also be buying up gold? We don’t know that for sure, but it seems likely. And, in addition, rumors sneaking off the mainland indicate that within the CIC, a lot of effort is being poured into prospective investment deals in the oil and precious metals sectors. The more it produces, the more it can keep.
The Chinese have made no secret of their disdain for current American economic policy and what they see as the inevitable destruction of the dollar. That they would be moving to diversify out of the greenback shocks precisely no one, and gold is one logical landing place for all those bucks. We suspect that’s exactly what is happening, behind the scenes as well as center stage.
Gold and silver pushed to the people. As recently as 2002, the private ownership of gold was prohibited in China. You could be jailed if caught with any in your possession. Beginning in 2009, in a stunning about-face, the central government removed all restrictions. In fact, as Mineweb and other sources report now it’s actively pushing folks to buy some personal metal, with China's Central Television, the main state-owned television company, running news programs cum infomercials, letting the public know just how easy it is to purchase gold and silver as an investment.
It truly is as simple as can be, because every bank sells gold and silver bullion bars in four different sizes to individuals. (Try to find the same the next time you make the trek down to Wells Fargo.) Mining companies are reportedly encouraging employees to convert some of their wages to gold on payday. Gold is traded in some form 24 hours a day. And paper proxies for the metal are also soaring in popularity.
There are persistent rumors that the export of silver has already been banned. Gold could be next.
Thus China, which only yesterday was the lowest per-capita consumer of gold in the world, is bidding to become the biggest. Some analysts believe it will pass India – the top dog since forever – as early as 2010. Clearly, the government believes the country is strengthened if everyone who can holds some hard currency.
All this suggests a mania in the making, and only in the formative stage. Imagine if hundreds of millions of new consumers climb on that particular bandwagon…
China repatriates its bullion. Meanwhile, in early September numerous sources (see, e.g.: http://www.marketwatch.com/story/hong-kong-recalls-gold-reserves-from-london-2009-09-03) reported an announcement that Hong Kong is pulling all its physical gold holdings from depositories in London and transferring them to a newly built, high-security depository at the city's airport.
That means the government is backing the promotion of Hong Kong to a more formidable status as a Swiss-style, regional trading hub for bullion, at the same time as it reduces London's role as a key settlement and storage center.
Press reports cited government officials as saying that marketing efforts will be launched to convince Asian central banks to transfer their gold reserves to the Hong Kong facility. Outreach will also be made to commodity exchanges, banks, precious metals refiners and ETF providers.
There can be little doubt this signals that the Chinese government fully recognizes the importance of gold in a time of crisis, and that the most prudent plan involves keeping its stores close at hand.
China threatens to “just walk away.” In one of the year’s most intriguing developments, commodity and derivative markets were thrown into a tizzy on Monday, August 31, by the worldwide circulation of a story published two days earlier in Caijing magazine (and reported by Reuters here: http://www.marketwatch.com/story/hong-kong-recalls-gold-reserves-from-london-2009-09-03).
According to the Caijing article, a spokesperson for China’s state-owned Assets Supervision and Administration Commission – the regulator and nominal shareholder for state-owned enterprises (SOEs) – told six foreign banks that SOEs reserve the right to default on contracts.
Say what?
Maybe the commission has been paying attention to the “just walk away” forfeiture movement that blossomed among American homeowners whose overall debt on their properties far exceeded the assessed value.
Small wonder there was panic in trading houses that hold a lot of Chinese paper. They hope any problems will be worked out short of a default. In fact, “It's [only] a handful of companies who are being encouraged by regulators to ‘re-negotiate’,” says one banking source. “It's outrageous, but it's China, so everyone is treading very carefully.” Very carefully.
Nevertheless, in addition to tangible losses, those potentially affected fear the establishment of a dangerous precedent, one that could lead to utter chaos in the enormous, tangled world of derivatives.
And there is one other, albeit highly speculative, possibility. Some major entities – we don’t know who, due to the opaque nature of international gold trading – have huge, perhaps quite concentrated short positions in the metal, both on the COMEX and OTC market. Is one of them China, acting through American intermediary banks?
A short position in precious metals means that the initiator of that position is obligated to deliver physical gold or silver if the buyer (who holds the long end) wants it. Suppose China is one of the big shorts. Suppose it’s been playing the market in order to buy at what it sees as bargain prices. Now suppose a gold rally induces it to just walk away from all those obligations to deliver. Who’s going to force it to make good? Guess what, no one has a gun large enough.
Granted, it’s an outlandish scenario. But impossible? No. Beijing has shown nothing but indifference to what others think of it. And if the dollar does crap out as the world’s reserve currency, there’s nothing to say that China won’t see its self-interest as lying in a completely new direction.
Conclusion. Gold, and the companies that produce it, have enjoyed a brisk runup of late, as the metal mounts yet another assault on the beckoning, symbolic $1,000 level. How much of this can be traced to what China has done, is doing, or may yet do?
We don’t know, but we suspect it’s not entirely coincidental. All rumor and speculation aside, as China clearly turns more and more bullish on gold, so will everyone else.
Hopefully you have already secured your share of physical gold and silver before the masses start a run on them. Another of our favorite gold-related investments for 2009 – with even more potential upside than the yellow metal – is a company that has delivered reliable returns throughout the last year… even at a time when the Dow and S&P were tanking. Thus we call it “48 Karat Gold.” Learn more here.
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FUQI has been making a mint on the shift in China, in those regards. But I suspect people still aren't going to believe what's happening in front of their eyes. Yes, the same people that ramble on about China supporting global equity bubbles once again - are the same people who talk down gold (and silver) as wingnut/doomsday.
Thanks, Andy, for using the "thinkolator" and saving me from dumpster diving yet another last chance add.
It had to be either Royal (royalties) or Wheaton, and it wasn't Wheaton, being focused on Silver. But thanks for 'refining' that further. Ahem.
While this article is interesting, I find it eerily similar to some of the content of another article already published on Zero Hedge: China et al: Puts Floor in the Gold Market by Asiablues, http://www.zerohedge.com/article/china-et-al-puts-floor-gold-market.
Asiablue's article is published a day earlier on Seeking Alpha and picked up by Reuter, etc. However, this "guest post" was not even picked up by Seeking Alpha and is sitting as an "instablog", I'm now less than impressed with this "guest post".
I have been a long time fan of Zero Hedge site, but this is one big disappointment to me.
ZH: One suggestion, vet future "guest posts" more carefully.
Interesting article, but you know I think I saw a similar post before. Yeah, it was yesterday! Asiablues wrote about this subject matter too. ZH, watch Asiablues…her content spreads quickly over them Interwebitubes.
Check it out:
http://www.zerohedge.com/article/china-et-al-puts-floor-gold-market
http://seekingalpha.com/article/160952-will-this-gold-rush-continue
http://jsmineset.com/
http://www.reuters.com/article/marketViews/idUSSeekingAlpha16095220090911
http://finance.yahoo.com/q/h?s=FCX
http://dianchu.blogspot.com/
Didn't know about that gold transfer... interesting
Love buying gold in Asia. So easy, and the spreads are much much less.
Agree, in Thailand, it is very easy to buy physical gold. Nearly every big shopping mall has a gold shop. 96.5% gold bar is very popular among Thai gold bugs. Jewelry stores use 96.5% gold to make necklace, ring and so on. Bid vs ask differs about $3/baht of gold bar.
2 baht of gold (in Thai unit) = 30.2 grams or 0.965 troy ounces
thing is exporting gold from Thailand prohibited without all the right permits failing which might lead to confiscation w/fine twice the value. I've found the spread can be somewhat higher. back in March gold dealers closed up shop for a week or so. Volatilty cited.
China supposedly the world's largest gold market.
http://debtsofanation.blogspot.com/2009/08/debts-of-lenders-china-become...
not sure about the link at the end of the article - seems like a late night infomercial even though it insists it is not - but when I read a pitch like this:
It’s basically the only way to make money in gold no matter what‘s going on in the markets."
http://www.caseyresearch.com/crpmkt/crpSolo.php?id=148&ppref=ZHB148ED0909B
When I read a pitch like that, my first thought is "Why is he telling me about this? Why isn't he just buying it?". I find it hard to believe any of it.
Wow a get rich pitch scheme. Disappointing indeed. If I see many more posts like this Zero Hedge will loose all credibility in my eyes.
China IS going for the gold! My wife, a Chinese national, recently setup a (physical) gold trading account in Shanghai with the Bank of China. It seems that the central bank of China is enthusiastically encouraging and facilitating physical gold purchasing and selling for Chinese citizens. My wife is hearing indidental stories of many (wealthy) chinese converting vast sums into physical gold. The Chinese are mortified by American monetary policy (ie, printing vast sums of money) as they still remember the devastating hyper-inflation resulting from the Chinese nationalists who did the same after WWII.
Great info... thanks...
it's not just china - it is happening stateside...
there are huge history making moves afoot on
the global stage...most folks cannot and will not
see them....the usa is about to get bitch slapped.....
the music is about to stop in the game of musical
chairs and debt based fiat currency....the usa
most likely will not have a chair although
it will pout and use its cia and military to
instigate one last hurrah....
I have been following this too...you saw what the Shanghai Copper Futures did when China gave credit to buy copper (another move away from USD). On Sept 28 china is releasing their own bonds. Reading between the lines, I am seeing China also thinking about becoming a major Car Maker and cutting out GM, Ford, etc...maybe even copying their designs? China HATES our USD, we are not listening at all to them and we deserve what we get. They will get their global currency, and we will not be number one....we just keep spending and spending. So yeah, pushing their people to buy gold is a lot better then pushing them to buy Real Estate and Stocks. I believe China is thinking just that when they got stuck with a bubble this year....btw the Shanghai Daily and The China Official Paper are a lot better sources of data IMHO........I talk a lot about it in my humble trading diary, which I normally reprint a lot of economic reports, Marc Chandler from BBH's FX comments (he emails them to me, and says it's ok), Fibo stuff,etc...while I watch the market fwiw....http://www.stockpickr.com/members/showforums/1/5723/
Here is the link to the official China Paper, IMHO it should be on everyone's reading list, much more insight then Market Watch, etc..http://www.china.org.cn/index.htm
Thanks TN; China is high up on my portfolio. Always looking for news articles. US media is about the last place to find good articles or info. Except here of course!
your welcome Lionhead....the other one I mentioned above is http://www.shanghaidaily.com/ there are about 15 other great sources to read via the internet I go thru daily....US media is normally so late to the party...Zero Hedge totally the place to hang with.
For Chinese, It is in GOLD they trust for at least 2000 years history, not paper money. It is surprising that the government starts encouraging them to buy at this moment. Why?
to force up the price of gold...
there are two reasons for this....1. the increase
benefits their gold holdings 2. the increase in
gold is to break the manipulation of the gold
cartel....once this happens the attractiveness
of usa debt vanishes....we will be forced to honestly
price our junk bonds and pay interest commensurate with the risk....
but more importantly an honest gold price is a
mediator of interest....so many people have
been robbed of an honest interest rate and artificially
low rates have impoverished america....
gold is always a competitor to paper which is why
the assholes in the government keep suppressing it....
china's embrace of gold is an epic development
in the power configuration of the world....
To give them something to protect.
Screw china. We got something better than Gold. We got illusions.
))
there's no such thing as an ownership even if you paid for your house all in cash.
just stop paying a property tax and you'll see who's the real owner of "your" house.
EXACTLY. That's why real estate scares me.
And what exactly do you think would happen if the government stopped paying it's debt obligations to the banks?
So, who really owns the government?
home ownership is a myth. we rent our homes from the state. if you think that you own it, then try not paying your property taxes one year and see what happens.
Make that just one week late this june, as in my case and the township of Old Bridge, NJ sent me a notice to foreclose my house. I had to pay nearly $100 to have my name removed from the supposed auction list. I don't have any mortgage on the house
so true.
Funny ... but sad. The worst part is that the money put up for the house by the bank (minus the minor down payment of course) was all conjured out of thin air. So they not only own your house, but they paid nothing to "buy" it.
Interesting speculation but too much speculation here to remain pertinent. If pitching gold is the objective I would have preferred a 'dollar doom' story instead.
you, my friend, are clueless.
China, Brazil and India will become world superpowers while USA withers to a socialist consumer debt ridden third world.
Fuck China. You can't believe a fucking thing they say. Inscrutable bastards
And you can believe what the US Goverment says?
CNBS (I mean, GE) said I could believe - no conflict of interest there......;)
Wow, finally a university educated academic in our midst. And of course Americans are being totally honest about the trillions of scams that is called market capitalism.
Hey, I paid for my edumac..., eduka..., my degree just like the rest of you.
When you have them buy the balls, their hearts and minds will follow.
You know this fact of life Vet.. Why so shocked and surprised?
I know, I know. I hate myself
Hate yo'self all you want... I still respect and admire you... Welcome to Friday my dear associate....
http://www.youtube.com/watch?v=VlaXZtd8_nM
Does Bobby Prechter know there is a country called China?
Bobby thinks china is something his grandmother had in her kitchen cupboards.
And when ginger was added made for a great pass along for a dinner party.
Richard Prechter is still counting waves.....:)
and shedlock........???? shedlock is talking about bakery unions.....:)
harde har har har.....man o man.......what a deal!!!
The Casey research stock is RGLD, it is a gold royalty company, that has goone straight up recently... However, the valuations are very very rich...
In the case of owning a home, in most states, assuming 3% price appreciation per year and a 30 year conventional mortgage, over the course of 30 years a homeowner will 1) pay 70% of the purchase price in interest to the bank, 2) will pay 70% of the purchase price in real estate taxes to the local municipality, 3) pay 10-15% to the insurance company in premiums... Of course people push homeownersip, it is a great deal for government, the banks, and the insurance companies... Not many asset (liability) classes like that...
Ugg, infomercials on ZH.
"48 karat gold"
I hate that kind of crap.
Read what Stock Gumshoe thinks 48 karat gold is.
http://www.stockgumshoe.com/2009/06/48-karat-gold-an-investment-worth-tw...
"So … pour that data into the Thinkolator, and it appears that this must be …
Royal Gold (RGLD)
The “48 Karat Gold” they’re referring to seems to be more broadly “mining royalties”, but the specific dividend paying investment should be Royal Gold, the leading gold royalty company."
.....
Hijack over, back to China.
China has its own gold mines. They are of very poor quality. It is very expensive to get an ounce of gold from mine to vault in China. Efficiently operating facilities in other countries run by private companies are costing mine to vault gold at $ 300 an ounce. China's mine to vault is probably $ 650 if not more. China's about-face in gold ownership is caused by China dumping the cost of mining its gold onto its citizens. With gold selling for $ 950+, China can afford to mine gold as long as it is sold in China. The amount of gold held by China would not buy one attack bomber from the US.
you're fucked up.....
the price of gold extraction in china is a non
sequiteur....especially since gold is underpriced...
regardless of the quality of those mines china
is the larget gold producer in the world and will probably maintain that position for some years...
please supply a reference for your claim of
650 usd/oz for production....
general costs for gold production are right around
price at this time....this includes exploration,
mining, refining, fabrication, and replacment...
world gold production has been declining since
2000 and shows no signs of reversing any time
soon because the gold cartel has suppressed the
price so long that it is uneconomical to mine...
then add that barrick - boy wonder of the mining
world - is defaulting on 8m oz of gold forward
sales which is over 1 year's worth of production
and you can see problems with current price
levels....
all of the dollars in the usa will fail to buy
an attack bomber with the collapse of the
dollar and usa economy....and that military
advantage no longer exists because the clintons
gave away huge amounts of it during the 1990s....
the chinese navy can challenge ours in the pacific....
besides, a military solution is a bullshit
solution....go tell your cia handlers to go
fuck themselves...
Bernanke would love to see gold higher- guy's dying for some inflation. He's in cahoots w/the chinos too. Last week when gold took off none of you gold missionarys peeped, now its up 60 and Huey is up 70 your pants are on fire- go get a hose, they all want it up>>> but not cause the world's gonna end. Mr O and Larry the lazy will kiss Bennys mott the hoople in front of a secret session of congress if he can get a little inflation flowing is this so hard.
Waterdog.
are you a paid shill for JPMorgan??
Lok up Sino Gold on the ASX. Check out their cash costs. China is 1/2 the $$ cost of Australia.
I hope you remove the bulbous Red nose before you inhale or it could get messy.
regards
Americans are taking china granted because they depend on exporting to America. Their employment is dependent on that. But, in bigger scheme of things i am not sure if they care unemployment. They are communist county. They can weather the storm if that is going to achieve their objective. China has amazing execution skills.
Yes, China's "execution skills" are indeed amazing.
With the possible exception of Texas, they "execute" far more efficiently than we do here in the US.
This story says China is buying a lot of gold. Then later, maybe they are short. Someone's very confused.
They are buying physical gold by keeping prices low with paper short positions. Now, they might walk away from short positions.
on comex there is no evidence of chinese shorts..
those are held by jmp, gs, ms, db....
more than likely those are usa govt shorts.
TD - You don't now? Now I feel better for sure.
What happens if the dollar starts to rally?
"Ah yes, we would actually like to collect on those short contracts. A-sank you."
"Try to find the same the next time you make the trek down to Wells Fargo"
You know, the guys whose ads picture a stagecoach carrying gold in the old West. Yea, them.
"And there is one other, albeit highly speculative, possibility. Some major entities – we don’t know who, due to the opaque nature of international gold trading – have huge, perhaps quite concentrated short positions in the metal, both on the COMEX and OTC market. Is one of them China, acting through American intermediary banks?"
Barrick Gold?
Bah - JP Morgan & Deutsche would love the company. Paper gold pirates...
Bank of Nova Scotia in Canada sells metal. Its right there, just drop it in your pocket.
What is people opinion on Prechters $400 gold call ?
Prechter doesn't have a $400 gold call. Prechter/Hochberg et al are actually bullish gold long term but think it will pull back to below $680 before resuming the uptrend. Right or wrong that's the call at Elliott Wave International.
"P. S. Remember... for only $39, you get:"
Started sounding like a shamwow/slap chop infomercial.
Thanks...but no thanks.
he who owns the gold makes the rules.....(and no i am not a mercantilist)
if china completes this transformation to a gold based economy then it will become without question the undisputed superpower of this century....
the only question is whether the usa goes in silence as the british did or if it puts up a big stink in the middle east as i predict....the correct solution would be to return to sound money.
a chinese century is a scary one - a communistic, harsh, and brutal one...however, pride goeth before a fall and the arrogance of debt based money is the supreme achievement of haughtiness....the usa is ruled by monsters and idiots - the bushes, harrimans, bundys, rockefellers of the first named, and the pelosis, reids, schumers, specters of the latter...
Shame! What is it with the link to the ad at the end of the article? zerohedge, shame on you, you just lost your reputation. Every time some clicks there zerohedge gets paid. Don't click on it!
How low have you descended? Why should we read anything else you write? Bye bye.
There really is no story here.
All this means is that China intends to maintain their Yuan/Dollar peg for the foreseeable future.
They are clearly promoting public gold ownership as a way for people to "hedge" against the inflationary effects of maintaining the peg.
Not really a BIG deal.
thanks for the foolish commentary.
When you can snatch the pebble from my hand, Grasshopper!
In other words..., when you can see the game changer before anyone else....
Someone thinks we're stupid. The heavy metal bubble is on their list to inflate right oh yeh last week.
http://www.youtube.com/watch?v=Q9DaloQskjc&eurl=
max keiser discusses barrack gold and jp morgan funny business
with rob kirby
the midas crutch for a crippled economy
speaking of china, the wsj reports that Obama okayed the tariffs on chinese imported tires (happy usa labor unions, natch), which is likely to perturb the chinese a wee bit. will be interest to see what Beijing responds with.
any thoughts on this from our china experts....
edit...link for article http://online.wsj.com/article/SB125271824237605479.html#mod=WSJ_hpp_MIDDLTopStories
From the article: "As recently as 2002, the private ownership of gold was prohibited in China...."
A ran that by a Chinese-born friend, he called BS. Anyone have a link either way?
BS TOTAL BS.
GLD crash. It is sort of a self assured mutual destruction which is an act of desperation on one half and an acted threat on the other half.
I have been buying Silver Maples .999 for the last 4 Years!
You must buy Silver now, don't miss the Train guys!
Sounds like someone is selling gold stocks... Lot of speculation, little deductive logic in this article. - george mcclure
Is this Guest Post an advertisement or genuine information?
Let me get this straight. Maybe I am missing something but we have a serious DISCONNECT here in this expose on China Gold mongering. How is it stated that China is quietly ammassing the shiny metal and then at the same time you imply that they have a massive short on it? You did imply that if the short failed that they would possibly walk away from that obligation. So, to clarify your thoughts (if I may), the Chinese are buying the stuff and the Short position is protecting their buying just in case the metal plunges, then if the metal goes to the moon, they just walk from the Short obligation and keep the shiny they own. Great plan. Where do I sign up?
All these crappy comments about China amount to one thing...paranoia and fear.
Gold is up cos the USD is down. The USD is down cos US rates have fallen massively and the USD has become a carry currency. Once rates rise then the USD will rise too and Gold wil fall.
By all means chase Gold, be the last in, enjoy your inevitable losses.
Trying to pitch investment or market theory subscriptions is the real Gold people like Casey are after. Casey is not capable of making a fortune on precious metals pics, but at 50,000 to 100,000 subscribers to say a $1000 per year newsletter, now you are talking a pretty fine royalty type income no? And without the downside risk attached of the markets to boot!
If I may solicit an opinion off topic for a moment. Since it is 9/11 just past. What is the opinion of the readership as far as US government involvement in that event?
cheers
To all of those who took the time to comment on my position about China, thank you very much. I agree with all of you.
A negative response is 1000% better than no response at all.
I do wish that those that become very upset with me use rough language to refer to me by, rather than vulgar. Many times, the reaction of the readers to my comments is more entertaining than the comment.
Keep it sweet, or I will piss everyone off, except Marla.
Ok, let's assume that China is *not* one of the big shorts (I have no reason to believe it is). Let's also assume that it is going to stand firm at the end of the month and demand delivery, which will force those participating in the gold carry trade to come forward (a repeat of earlier in the year: http://seekingalpha.com/article/129128-did-the-ecb-save-comex-from-gold-...).
1: Which big bear(s) will emerge from the forest?
2: Who will execute the stick-save?
I'm going with the JPM/Fed combo (based on Barrick's freakout).
http://gata.org/node/7773
Timing wise, possibly as soon as Sep delivery. If not then Dec would be a major pressure point if we don't already see a major COMEX default before then (triple witching + 6 month contracts).
The most disruptive case I can think of is that China emerge at the end of the month as a big taker of physical delivery, JPM is on the hook and can't deliver, and no CB (or the IMF) comes in for the save. What was JPMs net derivative exposure at last count?
CBs have to be aware of the risks associated with the carry trade (http://whiskeyandgunpowder.com/the-gold-carry-trade/) which might explain why CB gold sales have been so anemic the last few years, they're bunkering down:
http://www.gata.org/node/7396
Finally, here is a repost, but people *really* should read it, highly prophetic from 2003:
http://www.gold-eagle.com/editorials_03/siebholz062903.html