Guest Post: Is The Gold Price Dependent On China?

Tyler Durden's picture

Submitted by John Aziz of Azizonomics blog,

China now buys more gold than the Western world:

Gold_Demand_China_WGC

Does that mean, as some commentators are suggesting, that future price growth for the gold price depends on China? That if the Chinese economy weakens and has a hard landing or a recession that gold will fall steeply?

There’s no doubt that the run-up that gold has experienced in recent years is associated with the rise in demand for gold from emerging markets and their central banks. And indeed, the BRIC central banks have been quite transparent about their gold acquisition and the reasons for it.

Zhang Jianhua of the People’s Bank of China said:

No asset is safe now. The only choice to hedge risks is to hold hard currency — gold.

Indeed, this trend recently led the Telegraph’s Ambrose Evans-Pritchard to declare that the world was on the road to “a new gold standard” — a tripartite reserve currency system of gold, dollars and euros:

The world is moving step by step towards a de facto Gold Standard, without any meetings of G20 leaders to announce the idea or bless the project.

Some readers will already have seen the GFMS Gold Survey for 2012 which reported that central banks around the world bought more bullion last year in terms of tonnage than at any time in almost half a century.

They added a net 536 tonnes in 2012 as they diversified fresh reserves away from the four fiat suspects: dollar, euro, sterling, and yen.

The countries driving the movement toward gold as a reserve currency by building their gold reserves is that they are broadly creditor nations whose dollar-denominated assets have been relatively hurt by over a decade of low and negative real interest rates. The idea that gold does well during periods of  falling or negative real rates held even before the globalisation of U.S. Treasury debt.

The blue line is real interest rates on the 10-year Treasury, the red line change in the gold price from a year ago:

fredgraph (15)

 

The historical relationship between real interest rates and the gold price shows that it is likely not “China” per se that has been driving the gold price so much as creditors and creditor states in general who are disappointed or frustrated with the negative real interest rate environment. What a slowdown in the Chinese economy (or indeed the BRICs in general) would mean for the gold price remains to be seen. While it is widely assumed that a Chinese slowdown might reduce demand for gold, it is quite plausible that the opposite could be true. For instance, an inflationary crisis in China could drive the Chinese public and financial into buying more gold to insulate themselves against falling or negative real rates.

Of course, this is only one factor. There are no hard and fast rules about what drives markets, especially markets like the gold market where many different market participants have many different motivations for participating — some see gold as an inflation hedge, some (like the PBOC) as a hedge against counterparty risk and global contagion, some as a buffer against negative real interest rates, some as a tangible form of wealth, etc.

And with the global monetary system in a state of flux — with many nations creating bilateral and multilateral trade agreements to trade in non-dollar currencies, including gold — emerging market central banks see gold — the oldest existing form of money — as an insurance policy against unpredictable changes, and as a way to win global monetary influence.

So while emerging markets and particularly China have certainly been driving gold, while U.S. real interest rates remain negative or very low, and while the global monetary system remains in a state of flux, these nations will likely continue to gradually drive the gold price upward.

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SafelyGraze's picture

take-home message: when interest rates finally rise, gold price will plummet as people liquidate their stockpiles in order to take advantage of higher returns

take-home message: when interest rates finally rise, gold price will skyrocket as CBs print like crazy to cover interest payments that exceed tax receipts, devaluing the currency.

true brain's picture

Right on. The life span of fiat currency is about 40 years, historically. there is reason to expect this old hag to live any longer this time around. The world central banks can keep her on life support, hooked up to a paper drip for so long, before her fiat heart gives out. That will be one big funeral, or conflagration overshadowing WWII by several magnitudes.

AlaricBalth's picture

Dear Keynsians,
If gold is such a barbarous relic, why is Germany finally attempting to repatriate? Why is France willing to kill for it? Why is China amassing such so much? Why are more and more Americans buying gold? Why do fiat dependent banks try to suppress the price?
Just wondering.

EnslavethechildrenforBen's picture

The price of Gold is like the price of guns. When they're dissappearing off the shelves the price goes up.

 

GetZeeGold's picture

 

 

Keep subsidizing gold Ben Shalom.....it's the only government program that's ever worked for me.

 

I thank you....and so does China.

NOTfromSanFrancisco's picture

"Dear Keynsians,
If gold is such a barbarous relic... Why... Why... Why... Why..."

Answer... Crickets... Crickets... Crickets... and more crickets...

Al Huxley's picture

And why is it going to take 7 fucking years to get a lousy 350 tons?  If the vaults are really holding ~1500 tons of German gold, and all it's doing is taking up space and costing money in storage, why not transfer the whole fucking lot of it ASAP?  The contempt for the general public's intelligence is amazing (although given the booming business the 'Cash 4 Gold' stores seem to be doing, maybe it's largely justified).

Pegasus Muse's picture

James Turk talks about the German Gold Repatriation story and what is really going on behind the scenes. 

James Turk - Germany’s Gold Is Being Held Hostage 

blog:  http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/1/17_James_Turk_-_Germanys_Gold_Is_Being_Held_Hostage_1.html 

podcast:  http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/1/19_James_Turk.html

 

sampo's picture

I think Jamie and co. are seeking for a loophole/ensurance here to be the first hand owner and to be the priviledged for the phyzz.

TBTF's are testing their grand scheme in action now. If this shall pass, then it's going to be 400 year delivery for the repatriators last in line.

And of course this will open the gateway for the TBTF's to fill the Basel III requirements, as central banks revalue gold bidding for the same bars to deliver and to stack their own stock, with the taxpayer paid freshly printed fiatmoney.

Lore's picture

You don't keep all your stuff in your bank, do you?  Surely you leave some of it with a neighbor, and more with the guy down the street, and distant relatives!

The mistake we make with a lot of this stuff is to search for logic that makes sense to us.  These people are manipulators and swindlers.  All the "sustainable" and utopian-sounding elitist narratives in the world don't change that. When they're finished sucking dry the people around them, they're bound to turn on each other. It's already started. We're in for one heck of a light show.

Skateboarder's picture

Gold has almost become a metaphor for holding physical assets of any sort. As paper slowly loses value at first [and suddently at last], peeps all around will finally come to realize that if you don't possess items of physical value, you don't own jack shit. Gold has only so much use industrially - platinum on the other hand is of much higher value. Could say the same about silver.

Anyhow, the metaphor is a reminder that paper is only worth something as long as a promise is honored. And we know damn well there is no honor on the macro scale.

EDIT: Alaric, rational minds think alike. ;) My comment was trying to address the same issue you bring up. It's not about gold alone, but rather a diversity of physical ownership. Don't put all yer eggs in one glaring basket.

Winston Churchill's picture

Silver is the new copper,more an industrial metal now.

You may care to browse what happened to the industrial metals

1930/38. Gold was a different story.History may not repeat but ...........

GetZeeGold's picture

 

 

Only three years and he'll have that degree in journalism.

fockewulf190's picture

Confucius say: You now live in interesting time!  Great Reset coming grasshoppa!  Stack Phyzz!

agent default's picture

Message from reality:  The US is no longer a net creditor like it was in the early 80's.  When interest rates begin to rise, the Fed will take a huge hit on its balance sheet, the US Government will become insolvent overnight, and money printing will become irrelevant as the Dollar becomes worthless.  Everything in the commodity complex skyrockets as everyone dumps their USD reserves for physical assets.  Since the Dollar is  a huge currency by any standard, inflation created by massive Dollar dumping destabilizes all other currencies and destroys their credibility too, rendering them worthless as well.

I like it when some Europeans tell me that the Euro will become the next reserve currency in case of a Dollar collapse.  They must be putting something in the water in Europe.  You simply cannot be that delusional.

edwardo1's picture

It's not that The Euro will become the next reserve currency,

it is that there will be no reserve currency-an oxymoron if ever there was one-as physical gold will become the global reserve asset-it already is de-facto, but this will become "official". The Euro, (which marks its gold to market, unlike the U.S. Treasury-forget the Fed, as they are, and will be, irrelevant) will act as the medium of exchange that facilitates gold to, as it were, flow in sufficient size to allow global trade to continue.

A revaluation of physical will be a part of this process so as to allow extant debt to be reduced (if not outright extinguished) to a level where it ceases to cripple the global economy.

 

agent default's picture

Yeah, inflate until debt becomes serviceable.  Also known as losing count of the zeroes on a banknote.

cynicalskeptic's picture

Doesn't matter HOW high interest ragtes go when the purchasing power of your currency is dropping like a rock.  You can pay 100% interest a year and it means nothing if inflation is running at 1000%.  In such a scenario hard assets wil hold value better than pretty much anything else.

You may think equities are great sources of value in a meltdown but you can't count on them either.  The Zimbabwe Stock market had the highest 'growth' rate in the world at one point - nothing was worth 'more' - the currency stocks were priced in was worht LESS and LESS, while the companies were imploding because of the effects of hyperinflation.

lasvegaspersona's picture

edwardo1

and then there is also the other side of the trade....the seller. CBs deal in physical not derivatives of gold. There is a almost universally held assumption that buyers will drive up the price. I believe the surpise will come when sellers (of Size) suddenly leave the market. Paper gold does fine in it's function as a hedge. It does not do as a wealth asset. What happens when China suddenly finds it cannot get another 1000 tonnes this year?....tilt... game over!

Dr. Engali's picture

Interest rates rising that's pretty funny. In case it isn't clear by now ... Interest rates can never be allowed to rise. The U.S. could never service the debt. Interest rates will remain at these levels until the whole system finally comes unraveled.

NOTfromSanFrancisco's picture

"Interest rates rising that's pretty funny. In case it isn't clear by now ... Interest rates can never be allowed to rise."

But it is possible. Depending on the Thought of the Day, and who is making the decision of the day, MEGA BUCKS will be made by someone by taking reverse positions on rising interest rates if/when they go up. Ask George Soros how he made a large portion of his money, by taking reverse positions on currencies and interest rates. It is gonna be a Lose-Lose proposition no matter what, Keep your powder dry and your PMs hidden...

Non Passaran's picture

Primary dealers must buy unsold T's. Then they can repo them to get cash.
There can't be a failed auction.
Currency (confidence) collapse seems to be be the most likey ending, at least to me. We may be years away from that.

Barbaric relic's picture

What about Russia's purchases -- haven't they been buying 200 million a month of gold for a while now and 800 million in one month recently? 

Snakeeyes's picture

Whether it is China or Russia, gold has soared along with silver beating US housing and the US stock market. That should tell you something.

http://confoundedinterest.wordpress.com/2012/12/02/metal-mania-gold-silv...

Never One Roach's picture

true dat snakeeyes, my gld and slv are up 245% and 320% respectively,  while my humble house is down 38%....

cynicalskeptic's picture

just wait until it comes out that GLD and SLV aren't actually holding what they claim.......  those prospectuses have holes large enough to drive huge dump trucks through (think 'Die Hard With a Vengance' and what the Fed vaults looked like afterwards).

saints51's picture

China is likely going to buy all their oil in gold with their friends like Russia. No need to fire a bullet as they know the media will have a plot to make China look like a bad guy to create a war. Instead remove the USD being the world currency and crash economies allowing China to rise from the ashes to supreme power.

Never One Roach's picture

The Chinese don't trust their own companies and stock market (see the ZH caterpiller article). That's another reason why they turned to RE and now to gold, platinum, lumber, etc.; everyone there with any money already owns 4 or 5 apartments and they see houses now a Bubble.

DosZap's picture

Gold demand from China will have little effect on the sales, EVERY country of any size on the globe is printing to keep from meltdown.

People are starting to awaken to this, I expect Au/Ag to go near parabolic soon.

Global shortages of Ag, and when the paper market cannot sustain the suppression any longer(soon) to be, look out.

Better have all you can afford now.

As the entire global ponzi HAS to come down.

EnslavethechildrenforBen's picture

You can continue a Ponzi for eternity if you inprison everyone in a slave labor death camp like the Unted States for example.

Al Huxley's picture

No, actually you can't.  You can render it's collapse irrelevant, but you can't actually continue the ponzi without bringing in new suckers in to pay off the previous tier of suckers.

Non Passaran's picture

The productivity would crash. Non-physical laborers wouldn't produce much.

agent default's picture

Worked great for the USSR and the Eastern Block.  No, wait on second thought it didn't.

AustriAnnie's picture

Be careful with the word "soon"

Inevitable vs. Imminent.

Never underestimate the ability of extraordinary popular delusions and the madness of crowds to perpetuate a bubble longer than reason would expect.

That being said, I agree that "better have all you can afford now."  It's better to be too early, than to miss the boat[ing accident].  

Get your physical and wait.  Just don't put yourself in a position where you cannot afford to wait it out, and don't bet too heavily on the timing of events.

Ham-bone's picture

not saying I know shit from shinola and I like PM's likely more than the next guy...but...isn't it possible reason PM prices haven't skyrocketed is because US, EU, Japan are all in massive deflation from massive unservicable debt where net credit is contracting and new dollars are only going to service old debt and dollars, euros, yen are being destroyed faster than CB's are creating them (credit base big number...dollars/yen/euros monetary base small number regardless of it's recent skyrocket)...but PMs will be the shat if and when all that money starts to actually get into an expanding (rather than contracting) credit base...again, admiting eevrything I know I only think I know...jus saying

Spacemoose's picture

ham-bone.  i upped you because i've often thought the same thing.  it is possible that gold is accurately reflecting a deflationary environment for investment assets rather than being manipulated. or to put it another way, it is equities which are being manipulated, gold is actually telling the true story. in any event, i'll just keep stacking. 

Al Huxley's picture

If gold wasn't something worth holding, then central banks wouldn't bother holding it, and nobody would give a damn how much an oz cost in the various funny monies of the world.  At the end of the day it's as simple as that.  No matter what anybody in the media, or the government, or on the internet says.

francis_sawyer's picture

 "isn't it possible reason PM prices haven't skyrocketed is because US, EU, Japan are all in massive deflation from massive unservicable debt where net credit is contracting and new dollars are only going to service old debt and dollars, euros, yen are being destroyed"

~~

Technically ~ deflation does not occur as long as the debts are kept alive on a ledger somewhere [at 'mark to fantasy' valuations]... Which makes, 'DESTROYED', the operative word [as in ~ it's NOT BEING DESTROYED]...

~~~

That's what makes it a crooked ponzi... The 'buyers of last resort' here are the CB's who blow up their balance sheets with worthless 'assets' [that would never happen in a REAL economy ~ because in a REAL economy, nobody is given a franchise to print money out of thin air]... To cut to the end ~ it basically allows them the justification of printing HUGE amounts of new debt [out of thin air] which enter into the system [as service ~ vis-a-vis $85 billion a month, at present, of QE]... Nobody essentially ever sees any of that money... The banks themselves just use it to prevent the system from collapsing on top of them & meanwhile USE it for themselves [& their cronies] to skim incremental amounts of hard goods [for themselves], & otherwise manipulate the prices for everything, rig political elections, & feed propaganda into the system to make stupid people look the other way...

The MONEY DOES NOT PRINT ITSELF... These are criminals who have purposefully clustered themselves & mostly their own gene pool at the top of the food chain... They're a bunch of shits [& their 'apologists' are just as bad]... The cognitively dissonant others are just idiots... Nature, whenever it finally 'feels' like it, will catch up to all of these fools one day & take away everything...

kliguy38's picture

Nature is a bitch. There ARE Laws of Nature that cannot be changed and these laws are bitch when their full force is exerted. Gold is just ONE of the issues to deal with and whether it becomes a "reserve currency" doesn't matter that much.....it already is. In terms of time we are still in the early innings of this diabolical ponzi. If you believe they can truly create a Ponzi of infinite timelines need to only look at their past actions in historical terms. They'll turn this game off soon and there will be a lot of bagholders asking "how could we have not seen this coming?"......OBVIOUSLY you can see it.......you just can't believe your lyin' eyes.......relax...get some popcorn, if you planned well it really doesn't matter if its days, weeks, or months....the further its compressed the bigger the bang....and this one is already going to be a lot bigger than most, even here, can imagine......gl

DosZap's picture

Ham-bone

The thing to keep tabs on is the loss of confidence in the USD(and is happening more by the day), and globally all types of OTHER currency trades/Excahnges are coing into agreement.

When 2/3rds of EVERU dollar ever printed is OUTSIDE the US, when it starts coming home..............LOOK OUT.

Better not have much USD's on hand.

 

MedTechEntrepreneur's picture

..."possible reason PM prices haven't skyrocketed"...

 

Seems to me that normally the Bond Market would revolt but the CB's are controlling the Bond Market, so that means the currencies will ultimately collapse.  Then PM's are going to the moon.

AustriAnnie's picture

Money printing is a form of default.  (i.e. more claims are printed on the same underlying real wealth).

In a scenario where money printing is "expanding (rather than contracting) the credit base," but where that money creates no new real wealth (meaning, there is no real growth, no real productivity arising out of that credit expansion), then investors would see negative real returns, (more money and credit thrown at decreasing real wealth creation), no?

The key for gold, as I see it, is that in a world where a fiat dollar invested gets me real returns (increases my real wealth in terms of purchasing power), then I don't need gold.

If however, I see a world where unproductive individuals and corporations are granted ever-expanding credit, which gets spent on consumption and dividend payments and P/E multiple expansion rather than on productive investment, I need gold as an alternative to getting negative real returns.

Add to that the fact that in the race-to-debase, credit expansion on the part of sovereigns only goes to servicing debt, creating this negative return scenario on a larger scale, and increasing currency risk and sovereign risk, and all I see when I close my eyes is Exeter's pyramid.  

Expanding credit base, and expanding capital base -- are they the same thing?  Credit is just credit.  Capital (or at least as the term should be) is credit used for productive purpose.  When credit expansion is severed from capital investment, then I see gold doing well.

Just my thoughts. 

A Lunatic's picture

Which would you rather have, a backhoe that you use occasionally, but would be real handy if SHTF, or the monetary equivalent in PM's, which would also be real handy.........

AgAu_man's picture

You offer a binary either/or scenario.  But since real life is not like that, many smart & shrewd people know to avoid these contrived 1-D, binary choices of "Backhoes vs. AU".  Expand your choices and down-select from there.

The generic advice is, as Skateboarder has shrewdly pointed out above:  Diversify into as many real assets as possible.  Ag, Au and Pt being only a part of that basket of real and useful assets.  Be suspicious of ppl who try to steer you almost exclusively into one asset (class).  Since the American culture is so conditioned to the single-solution, 'magic bullet' mentality, opportunists will try to take advantage of that.  These single-asset advocates are either ignorant fools, useful idiots, or shills.  And potentially very dangerous to your economic and financial health.

Like people, each real asset has a part/role to play for any given condition.  Conditions vary.  Happy Real Diversification!

Irelevant's picture

What are these other assets? Realestate? You pay taxes, easy to confiscate (see white farmers in Zimbabwe), iPads?! Rare earths? Very dificult to hold them yourself. You need something small and valuable, easy to carry without counterparty risk. Gold fits the bill. I'm doing my best in the last year to think of other assets besides gold, guns and silver and I'm not able to come up with anything. Please advise.

r3phl0x's picture

Throughout history the wealthy have used a wide variety of collectibles as a store-of-value: Wine, Cigars, Artwork, Historical Artifacts, Vintage Cars, Aircraft, ...

There are some disadvantages vs PMs (not as durable, not fungible, not always divisible, not as widely-accepted in trade) but they are similar in that they are legal to own, easy to transport/physically dense, naturally scarce, have secondary/commodity value (at least for wine/cigars), are still fairly durable, challenging to counterfeit, concealable, tend to appreciate over time, and - most importantly - they are not somebody else's liability and are not subject to the whims of government or bankster thugs (currency controls, ATM limits, bank holidays, CTRL-P, and whatever evil shit they think up next).

AgAu_man's picture

To each his own, but we are into 'gentrified country living':

Investment (not hope or speculation) into things that will only cost more and we enjoy regularly: lamb, beef, wine from our own land. We make hobbies out of pickling, making cheese, salami (the real jerkey!), brewing lager, cider, and making liqueurs. We buy organic foods wholesale, and eat it, freeze it, dry it (fruit, mushrooms).

And that darn fiat paper I occasionally... "win in Asian casinos", well, if I don't spend it, I like to buy golden Chinese teddy bears -- Pandas -- or carbon-based clear, shiny crystals. I leave them where I can use them on a future trip with the family.

Also like making fiat from rental property via LLCs. Trade fiat for more rental property or other real assets. An LLC and a quality CPA are all far better investments than Wall St. paperware/vaporware.

And, yes, we've had a second set of Travel Papers for years. Haven't tried it, but heard from reliable ppl, that foreign institutions don't like to see US passports. Seems they are into commerce, not central planning by foreign powers.

All good diversifications for us, beyond the Precious.

Hope this is more useful and actionable for you than a cute punchline or Bernanke expletive.