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Guest Post: Why The West Sells Gold And China Buys It

Tyler Durden's picture




 

Submitted by Alasdair Macleod via GoldMoney blog,

A number of readers have recently suggested there must be collusion between America and China over the transfer of physical gold from Western capital markets. They assume that governments know what they are doing, so there is a bigger game afoot of which we are unaware.

The truth is that China and Western capital markets view gold very differently. You will hardly find anyone in the London Bullion Market who regards gold as money; and for them if gold is no longer money Chinese demand for it is not a monetary issue. Instead it threatens the bullion banks' business that a useful financial asset, capable of earning many times its physical value in fees, commissions, turns and interest, is being leeched out of the market by Chinese aunties.

It is clear that nearly all Western central bankers share this view, believing that gold will never play a monetary role again. We also know that Marxist-educated government advisers in China have been sheltered from the Keynesians' antipathy against gold and instead have been brought up on Marx's belief that Western capitalism will eventually destroy itself. It therefore follows they believe that western paper currencies will probably be destroyed as well.

Otherwise we can only speculate, but the following conclusions about why the Chinese are accumulating gold seem to make most sense:

  • There is a fundamental view in China that gold is ultimately money, so it is always worth accumulating by selling potentially worthless foreign currency.
  • Encouraging her citizens to accumulate gold achieves two objectives: if they have real wealth to protect it makes them potentially less rebellious in difficult times; and secondly private buying of gold reduces the trade surplus, which in turn reduces the accumulation of foreign currency reserves.
  • Gold is generally accepted as superior money throughout Asia, which is China's long-term regional interest.
  • The Chinese Government (and/or the Communist Party) is buying gold for itself. Assumptions it will use gold to beef up the renminbi makes little practical sense, beyond perhaps some window-dressing for currency credibility. Instead she appears to be accumulating gold for unstated strategic reasons.
  • Keeping the West short of gold gives China huge leverage in today's cold currency war, and even more if the currency war heats up.

The idea that America is colluding with China in the gold market must therefore be nonsense. The truth has everything to do with different philosophies about gold.

Advanced western economies have survived without using gold as money for a considerable time. Currency and credit inflation have created a modern finance industry wholly dependent on fiat paper and everyone in mainstream finance is conditioned to believe in the profitable world of fiat currencies. They are therefore predisposed to dismiss gold as never being money again.

That is why the West is less worried about losing physical gold than it should be, and China is glad of the opportunity to buy it. And she can be expected to continue to do so whatever the price, because she knows that in the final analysis gold is the only true money.

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Tue, 01/21/2014 - 16:00 | 4352697 Joebloinvestor
Joebloinvestor's picture

Pretty simple really,

 

The west convinces whoever that a fiat currency "works".

 

The east doesn't trust the west.

Tue, 01/21/2014 - 16:11 | 4352753 Future Tense
Future Tense's picture

It's interesting to think that the gold bull market of the 1970's was driven by the United States alone. Even if the U.S. temporarily enters deflation, a hyperinflation in the more likely country of Japan would be enough to carry demand world wide. The following article walks through the coming Japan implosion in simple terms:

http://www.ftense.com/2014/01/2014-outlook-rogue-wave-1-japan-is.html

 

Tue, 01/21/2014 - 16:20 | 4352799 Pinto Currency
Pinto Currency's picture

 

The West sells gold and the East buys gold because the West believes the falling paper price established in London where, each day, they trade 900x the daily global mine production of gold.

 

The East doesn't trust the government or the manipulated markets and they just want the gold in their hands.

 

http://www.safehaven.com/print/32394/for-prime-minister-cameron-re-lbma-gold-trading

Tue, 01/21/2014 - 16:26 | 4352830 BaBaBouy
BaBaBouy's picture

The Song Remains The Same...

GOLD $50K...
It Will Happen And Most Will Be Caught Off Gaurd With
Their Keynsian FIAT PANTS Down...

Tue, 01/21/2014 - 16:32 | 4352863 thtmnbhndthecrtn
thtmnbhndthecrtn's picture

.......and the Fed's wiener in their butts.

Tue, 01/21/2014 - 16:50 | 4352947 Xibalba
Xibalba's picture

All of this action just to raid the GLD of 900+Tons 

Tue, 01/21/2014 - 19:25 | 4353542 andrewp111
andrewp111's picture

The Chinese play a bigger game than that. Maybe they want to create a short squeeze that will force the Comex to default and allow the Chinese to set the USD price of gold anywherte they wish.

Wed, 01/22/2014 - 00:14 | 4354071 SafelyGraze
SafelyGraze's picture

the big joke will be on the chinapeople when they discover that gold is not backed by anything!!!

and then we shall see who has the backing of the government and who is left holding worthless shiny yellow rocks!!!

Wed, 01/22/2014 - 01:17 | 4354540 -NaN-
-NaN-'s picture

yep, history will show that it happens all the time.  Good thing we have fiat!  

Wed, 01/22/2014 - 04:38 | 4354744 matrix2012
matrix2012's picture

SafelyGraze, i voted you UP believing you're playing humorous :-) a subtle joke typical of ZHers

for the /s tag will just be spoiling the fun part (the same goes for Nan's one)

Wed, 01/22/2014 - 07:55 | 4354867 PP
PP's picture

In China:

Export silver / gold: forbbiden

Taken out of country: no more than 50g gold / person (citizen and foreigner), otherwise - go to jail, silver similar

Chinese government want citizen to buy gold and hold it within country as much as possible, means government want retail investors to accumulate gold, not by a single largest agency.

 

 


Wed, 01/22/2014 - 09:18 | 4354941 SafelyGraze
SafelyGraze's picture

matrix2012 -

sometimes I think maybe I leave out the /s too much

Tue, 01/21/2014 - 22:45 | 4354214 Drifter
Drifter's picture

China doesn't have an unbacked (and wildly printed) reserve currency to defend.  They don't have to bash and trash natural "competitors" to an unbacked (and wildly printed) reserve currency.

Fed has two options regarding gold.  (1) Back the currency with it, but it would be something like $500,000 / ounce (because Fed has no gold to speak of), and worthlessness of USD would be exposed for all to see. (2) Keep USD unbacked and keep manipulating gold price down to prevent it natually rising to $500,000 / ounce (because everyone knows Fed has no gold to speak of).

And the "wildly printed" aspect is exposed by bitcoin, very much like USD with one major exception, there's a hard cap on the quantity, it can't be wildly printed.

That's the only reason bitcoin trades at $1,000.  Limited quantity. 

It's becoming a major embarrassment to the Fed now.  Every day more people ask why bitcoin trades at $1,000 when it's a fantasy currency just like USD, and there's one obvious answer, the quantity is limited, unlike USD that can be printed to infinity (and will be).

 

Tue, 01/21/2014 - 17:39 | 4353157 funthea
funthea's picture

$50k gold only happens in a hyperinflationary senario. Its much the same case as with bitcoin... if it rises too much on its own, the masses without it will simply use another, if even inferior form, simply based on the obsticals of entry.

Gold only goes so high on its own before an alternitive is more attractive, like silver. I could see gold at as high as maybe $3k and silver to $100. Of course, hyperinflation would change these numbers.

Tue, 01/21/2014 - 20:10 | 4353713 boogerbently
boogerbently's picture

The USA has a 200+ year history of being "trustworthy".

And as long as we've used fiat (noon gold backed) we have proven we've "been good for it".

When all the LIARS are exposed, gold is the only true measure left.

As fart as bitcoin (I left the Freudian/typo in) there is NO history, and NOTHING to "back it up".

What stands behind it? The "full faith and credit of"......who?

Besides, do you really want a "currency" that can gain or lose 30% in a day?

Wed, 01/22/2014 - 04:50 | 4354756 matrix2012
matrix2012's picture

@ boogerbently

"The USA has a 200+ year history of being "trustworthy".

And as long as we've used fiat (noon gold backed) we have proven we've "been good for it".

When all the LIARS are exposed, gold is the only true measure left.

As fart as bitcoin (I left the Freudian/typo in) there is NO history, and NOTHING to "back it up".

What stands behind it? The "full faith and credit of"......who?

Besides, do you really want a "currency" that can gain or lose 30% in a day?"

 

DONT YOU KNOW that it's SATOSHI-SAN's ALGO who provide the FULL FAITH and credit of BITCOIN. Or one may simply say it's electron that backs up the BTC.

Just place you faith in it and remain faithful, you will all go well and prosperous, the BITCOIN will go skyrocket-high eventually... :-)

must say that i luv yr simple short lines ;)

Tue, 01/21/2014 - 16:29 | 4352848 Harbanger
Harbanger's picture

No Surprise here.  Anyone who knows fundamental economics, knows that Gold always moves from Nations with trade deficits to Nations with trade surpluses.  Hence the flow from west to east.

Tue, 01/21/2014 - 16:34 | 4352877 SovietCong
SovietCong's picture

That pretty much sums it up. Also, the key piece missing is the fact that the Chinese are on a long-term plan to diversify away from the dollar into hard assets that would establish Yuan's international status in the future, after the dollar collapses and loses its fuction as the reserve currency. Altogether, I found the post quite disappointing in its obviousness.

Tue, 01/21/2014 - 16:55 | 4352930 wee-weed up
wee-weed up's picture

 

 

Yep, the ChiComs play gold for the long term...  (years, decades)

The West only plays it for the short term.  (weeks, months)

Tue, 01/21/2014 - 19:22 | 4353536 andrewp111
andrewp111's picture

The ChiComs have only been sucking up the gold supply for 2 years. That doesn't sound long term to me. Something is going on. Maybe they are trying to create a short squeeze in order to make big profits???

Tue, 01/21/2014 - 19:39 | 4353594 RabbitChow
RabbitChow's picture

And the ameri coms have been selling it, for years if not decades.

Tue, 01/21/2014 - 20:10 | 4353714 boogerbently
boogerbently's picture

....with HFT's, nano seconds.

Wed, 01/22/2014 - 05:02 | 4354766 matrix2012
matrix2012's picture

SovietCong

 

Welcome to Your Very FIRST posting at ZH after staying here for 2 years 34 weeks

amazing feat...may I ask you what's the urgency that lures you into registering yr very 1st comment here today??

somewhat feel blessed with luck to be able to notice this rarity....

 

seeing more and more new nicks with 2 to 3 year-long membership here :-) amazing ZH!

 

 

Tue, 01/21/2014 - 16:17 | 4352788 jbvtme
jbvtme's picture

anyone who doubts that gold is wealth, you might want to ask the aztecs and incas how their day is going.

Tue, 01/21/2014 - 16:28 | 4352846 Loucleve
Loucleve's picture

it was wealth, and the spaniards stole it.

and it still is wealth.

Tue, 01/21/2014 - 16:33 | 4352864 Harbanger
Harbanger's picture

Someone must have later stolen it from the Spaniards, cause now they're worse off than Mexico.

Tue, 01/21/2014 - 16:59 | 4352955 wee-weed up
wee-weed up's picture

 

 

How much you wanna bet...

Much of that Aztec and Inca gold...

That has passed through many hands over the years...

Now resides in China?

Tue, 01/21/2014 - 17:09 | 4353031 MeelionDollerBogus
MeelionDollerBogus's picture

Vatican.

Tue, 01/21/2014 - 17:40 | 4353169 wee-weed up
wee-weed up's picture

The Vatican's gold stocks are being slowly sold off to pay for the pedophile priests scandals.

Tue, 01/21/2014 - 19:56 | 4353656 tradebot
tradebot's picture

They can afford the pervert pay offs  The Vatican has wealth beyond belief.  The artifacts hidden away there are priceless...like un-obtainium.  They let queers in and that was mistake,but they can afford to take care of who ever gets busted playing hide the weenie.

Tue, 01/21/2014 - 17:36 | 4353155 Nassim
Nassim's picture

The "Spanish" gold moved East. The Spanish empire had massive trade deficits and was running expensive wars far from home.

Tue, 01/21/2014 - 19:43 | 4353606 RabbitChow
RabbitChow's picture

Nah, they put it on their boat and went to sea. The boat turned over and it all went to the bottom. Familiar atory if you think about it.

Wed, 01/22/2014 - 01:45 | 4354573 Muc Metals
Muc Metals's picture

What are the US doing just now? ;)

Tue, 01/21/2014 - 16:17 | 4352761 Ignatius
Ignatius's picture

Gold is wealth.  The storage of wealth is the key issue.

Example:  Owning a rare painting is also a store of wealth, but it loses value if cut into smaller pieces.  Yet, offer a large enough stack of coins and one will own the whole painting.  An economy can run on simple currency (like our debt based currency), but it has a hard time efficiently storing wealth.  When one stores wealth in debt promises the wealth evaporates the moment the debt can't be paid. Bail-outs, QE and bail-ins are examples of debt-based currency failure to store wealth.

Tue, 01/21/2014 - 21:48 | 4354001 acetinker
acetinker's picture

Maybe you're smarter than me, maybe not.  That's actually not important because it's the things we can share that make us all smarter.

Anyways- Why shouldn't a nations' currency be based on headcount alone?  I don't mean that each newborn is issued an amount of cash at birth.

To the contrary, the treasury (or the fed if you can come up with a valid reason why private cartels should be allowed to exist) simply expands/contracts the amount of money in the system based on population?

Yes, in the current paradigm, gold is wealth.  Is that smart, really?  If you need more "wealth", you must continue to dig ever deeper holes?

Maybe I'm stupid, but the whole concept of "resources as a medium of exchange" and "dig shit up and call it wealth" seems unviable in the long run.

Tue, 01/21/2014 - 21:58 | 4354073 Ignatius
Ignatius's picture

Gold is a wealth reserve asset.  Savings.  It DOES NOT have to be the medium of exchange and it's probably best that it isn't.  Some 'goldbugs' will disagree (downvotes incoming).

If you produce above your daily needs then how do you save for future needs?  If you save a promise (eg, bonds) and the promise is broken then you're shit outa luck.  Gold is not a promise, but represents payment in full.

Tue, 01/21/2014 - 22:09 | 4354115 acetinker
acetinker's picture

Cool, so we agree, at least a little bit.  Stlll, I think the amount of currency in circulation should be based on headcount and not on what the individual "heads" are willing to borrow into circulation.  Doesn't have anything to do with actual "wealth",  That's a whole 'nother question.  The more we perforate the surface of our home, the less she is worth to all of us.

Tue, 01/21/2014 - 22:23 | 4354151 Ignatius
Ignatius's picture

Well, yes, I think currency should be created by the treasury as a public utilty and issued/spent as an asset.  Lincoln did this with his greenbacks.  After the civil war the banks lobbied and worked to have them withdrawn from circulation.  A big recession/depression ensued.  The financial class will fight this at every turn (and have in the past).  The banking class kills to maintain their money cartel.  So it's not so much an intellectual battle as it is a war or revolutionary power struggle.

Check this out:  https://www.youtube.com/watch?v=5iBSBVew-3Y

Tue, 01/21/2014 - 23:29 | 4354315 acetinker
acetinker's picture

I have now been full-circle.  Damon Vrabel is in my humble opinion, one of a very few who fully comprehends, and can articulate the fatal flaw in fractional reserve banking.  You do realize, of course that he voluntarily stopped his crusade, right?

He said that if he were to have his way, that he would then, become the tyrant he wished to extinguish.

I am sad that Damon uses his considerable intellect to write editorials for Canada Free Press now, but I recognize that he actually is much smarter than me.

That he is relegated by his own volition to his current role, is sadder still.

Wed, 01/22/2014 - 02:24 | 4354634 Ignatius
Ignatius's picture

"You do realize, of course that he voluntarily stopped his crusade, right?"

Yes.

Tue, 01/21/2014 - 16:32 | 4352858 Son of Captain Nemo
Son of Captain Nemo's picture

Yeah that's some of it Joebloinvestor

But you conveniently left out the part about using excessive force with a conventional and nuclear arsenal that is one of the largest in the world when the East buys up the rest of that useless relic and the West asks for it back at a time and date of it's choosing!

Unfortunately you have to think like a psychopath in order for any of it to make sense.

Tue, 01/21/2014 - 17:09 | 4353021 Joebloinvestor
Joebloinvestor's picture

I don't see where anyone was forced to abandon the gold standard at the point of a gun, let alone a nuke threat.

What is really scary is the Nixon argument at the time made sense to the ones that had the power to pull it off.

Tue, 01/21/2014 - 18:32 | 4353386 Son of Captain Nemo
Son of Captain Nemo's picture

I don't see where anyone was forced to abandon the gold standard at the point of a gun, let alone a nuke threat.

Not yet at least.  When the "Anglo-American Israeli" banking alliance loses everything that's embedded they will use all the force dominance they have because that's why the military budgets have been so enormous for so long! Just ask Saddam Hussein and Muammar Gadaffi what happens when you attempt to throw out Western imperialist banks from your Country for making deals in currencies other than there own?

Again Joeblo. If you think like a psychopath then anything is possible and can become both sensible and "normal" in a warped mind. 

Tue, 01/21/2014 - 18:33 | 4353390 BigJim
BigJim's picture

 I don't see where anyone was forced to abandon the gold standard at the point of a gun, let alone a nuke threat.

I'm pretty sure if the French had turned up and tried to prise their gold out of the hands of the NYFRB in exchange for the dollars that had been promised to be 'as good as gold' they would have been met with force.

Tue, 01/21/2014 - 19:24 | 4353489 Son of Captain Nemo
Son of Captain Nemo's picture

Are we talking after Richard Nixon made his big announcement following Bretton Woods?... er....

Since I wasn't in Manhattan in 1971, I'll have to go with the narratives I've heard that Prime Minister Pompidou sent the French Navy to  "do just that"...

Besides.  Didn't you know their was an "R" in France as well as in England!... 

They don't call them wanderin for nothin!!!

Tue, 01/21/2014 - 16:03 | 4352707 Herd Redirectio...
Herd Redirection Committee's picture

OK, so idiocy, not collusion?  I feel better now.

Tue, 01/21/2014 - 16:10 | 4352749 Canadian Dirtlump
Canadian Dirtlump's picture

I think it suits the needs of the respective parties, and when it doesn't we'll have a war.

 

China owes the west and Japan and I expect we'll get paid in full at some point.

Tue, 01/21/2014 - 16:14 | 4352776 LawsofPhysics
LawsofPhysics's picture

Excellent choice of language.  From were I sit, I see many current accounts that need to be "balanced".  We should probably start by giving all those bankers and financial paper-pushers who got us here exactly what they are "owed"... 

Clear out some of the riff-raff and have plenty of space for WWIII in earnest (although one wonders what would be left after destroying the earth a few times over with nuclear weapons).  Is there an ETF on radiation tolerant bacteria?

Tue, 01/21/2014 - 16:29 | 4352851 Loucleve
Loucleve's picture

thats the most ridiculous thing i've ever heard.

china owns 1.2 TT in t bonds.  that means we owe them.

Tue, 01/21/2014 - 16:46 | 4352926 Herd Redirectio...
Herd Redirection Committee's picture

He means China owes the West payback.  What is the 'payback period'?  Don't know.

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