How China Imported A Record $70 Billion In Physical Gold Without Sending The Price Of Gold Soaring

Tyler Durden's picture

A little over a month ago, we reported that following a year of record-shattering imports, China finally surpassed India as the world's largest importer of physical gold. This was hardly a surprise to anyone who has been following our coverage of the ravenous demand for gold out of China, starting in September 2011, and tracing it all the way to the present.


China's apetite for physical gold, which is further shown below focusing just on 2012 and 2013, has been estimated by Goldman to amount to over $70 billion in bilateral trade between just Hong Kong and China alone.


Yet while China's gold demand is acutely familiar one question that few have answered is just what is China doing with all this physical gold, aside from filling massive brand new gold vaults of course. And a far more important question: how does China's relentless buying of physical not send the price of gold into the stratosphere.

We will explain why below.

First, let's answer the question what purpose does gold serve in China's credit bubble "Minsky Moment" economy, where as we showed previously, in just the fourth quarter, some $1 trillion in bank assets (mostly NPLs and shadow loans) were created  out of thin air.

For the answer, we have to go back to our post from May of 2013 "The Bronze Swan Arrives: Is The End Of Copper Financing China's "Lehman Event"?", in which we explained how China uses commodity financing deals to mask the flow of "hot money", or the one force that has been pushing the Chinese Yuan ever higher, forcing the PBOC to not only expand the USDCNY trading band to 2% recently, but to send the currency tumbling in an attempt to reverse said hot money flows.

One thing deserves special notice: in 2013 the market focus fell almost exclusively on copper's role as a core intermediary in China Funding Deals, which subsequently was "diluted" into various other commodities after China's SAFE attempted a crack down on copper funding, which only released other commodities out of the Funding Deal woodwork. We discussed precisely this last week in "What Is The Common Theme: Iron Ore, Soybeans, Palm Oil, Rubber, Zinc, Aluminum, Gold, Copper, And Nickel?"

We emphasize the word "gold" in the previous sentence because it is what the rest of this article is about.

Let's step back for a minute for the benefit of those 99.9% of financial pundits not intimate with the highly complex concept of China Commodity Funding Deals (CCFDs), and start with a simple enough question, (and answer.)  

Just what are CCFDs?

The simple answer: a highly elaborate, if necessarily so, way to bypass official channels (i.e., all those items which comprise China's current account calculation), and using "shadow" pathways, to arbitrage the rate differential between China and the US.

As Goldman explains, there are many ways to bring hot money into China. Commodity financing deals, overinvoicing exports, and the black market are the three main channels. While it is extremely hard to estimate the relative share of each channel in facilitating the hot money inflows, one can attempt to "ballpark" the total notional amount of low cost foreign capital that has been brought into China via commodity financing deals.

While commodity financing deals are very complicated, the general idea is that arbitrageurs borrow short-term FX loans from onshore banks in the form of LC (letter of credit) to import commodities and then re-export the warrants (a document issued by logistic companies which represent the ownership of the underlying asset) to bring in the low cost foreign capital (hot money) and then circulate the whole process several times per year. As a result, the total outstanding FX loans associated with these commodity financing deals is determined by:

the volume of physical inventories that is involved

commodity prices

the number of circulations

A "simple" schematic involving a copper CCFDs saw shown here nearly a year ago, and was summarized as follows.

As we reported previously citing Goldman data, the commodities that are involved in the financing deals include copper, iron ore, and to a lesser extent, nickel, zinc, aluminum, soybean, palm oil, rubber and, of course, gold. Below are the desired features of the underlying commodity:

  • China is heavily reliant on the seaborne market for the commodity
  • the commodity has relatively high value-to-density ratio so that the storage fee and transportation cost are relatively low
  • the commodity has a long shelf life, so that the underlying value of the commodity will not depreciate significantly during the financing deal period
  • the commodity has a very liquid paper market (future/forward/swap) in order to enable effective commodity price risk hedging.

Here we finally come to the topic of gold because gold is an obvious candidate for commodity financing deals, given it has a high value-to-density ratio, a well-developed paper market and very long "shelf life." Curiously iron ore is not as suitable, based on most of these metrics, and yet according to recent press reports seeking to justify the record inventories of iron ore at Chinese ports, it is precisely CCFDs that have sent physical demand for iron through the proverbial (warehouse) roof.

Gold, on the other hand, is far less discussed in the mainstream press in the context of CCFDs and yet it is precisely its role in facilitating hot money flows, perhaps far more so than copper and even iron ore combined, that is so critical for China, and explains the record amount of physical gold imports by China in the past three years.

Chinese gold financing deals are processed in a different way compared with copper financing deals, though both are aimed at facilitating low cost foreign capital inflow to China. Specifically, gold financing deals involve the physical import of gold and export of gold semi-fabricated products to bring the FX into China; as a result, China’s trade data does reflect, at least partially, the scale of China gold financing deals. In contrast, Chinese copper financing deals do not need to physically move the physical copper in and out of China as explained last year so it is not shown in trade data published by China customs.

In detail, Chinese gold financing deals includes four steps:

  1. onshore gold manufacturers pay LCs to offshore7 subsidiaries and import gold from bonded warehouses or Hong Kong to mainland China – inflating import numbers
  2. offshore subsidiaries borrow USD from offshore banks via collaterizing LCs they received
  3. onshore manufacturers get paid by USD from offshore subsidiaries and export the gold semi-fabricated products to bonded warehouses – inflating export numbers
  4. repeat step 1-3

This is shown in the chart below:


As shown above, gold financing deals should theoretically inflate China’s import and export numbers by roughly the same size. For imports, they inflate China’s total physical gold imports, but inflate exports that are mainly related to gold products, such as gold foils, plates and jewelry. Sure enough, the value of China’s imports of gold from Hong Kong has risen more than 10 fold since 2009 to roughly US$70bn by the end of 2013 while exports of gold and other products have increased by roughly the same amount (shown below). This is in line with the implication of the flow chart on Chinese gold financing deals: the deals inflate both imports and exports by roughly equal size.

Given this, that the rapid growth of the market size of gold trading between China and Hong Kong created from 2009 (less than US$5bn) to 2013 (roughly US$70bn) is most likely driven by gold financing deals.

However, a larger question remains unknown, namely that as Goldman observes, "we don’t know how many tons of physical gold are used in the deals since we don’t know the number of circulations, though we believe it is much higher than that for copper financing deals."

Recall the flowchart for copper funding deals:

  1. Step 1) offshore trader A sells warrant of bonded copper (copper in China’s bonded warehouse that is exempted from VAT payment before customs declaration) or inbound copper (i.e. copper on ship in transit to bonded) to onshore party B at price X (i.e. B imports copper from A), and A is paid USD LC, issued by onshore bank D. The LC issuance is a key step that SAFE’s new policies target.
  2. Step 2) onshore entity B sells and re-exports the copper by sending the warrant documentation (not the physical copper which stays in bonded warehouse ‘offshore’) to the offshore subsidiary C (N.B. B owns C), and C pays B USD or CNH cash (CNH = offshore CNY). Using the cash from C, B gets bank D to convert the USD or CNH into onshore CNY, and trader B can then use CNY as it sees fit.
  3. Step 3) Offshore subsidiary C sells the warrant back to A (again, no move in physical copper which stays in bonded warehouse ‘offshore’), and A pays C USD or CNH cash with a price of X minus $10-20/t, i.e. a discount to the price sold by A to B in Step 1.
  4. Step 4) Repeat Step 1-Step 3 as many times as possible, during the period of LC (usually 6 months, with range of 3-12 months). This could be 10-30 times over the course of the 6 month LC, with the limitation being the amount of time it takes to clear the paperwork. In this way, the total notional LCs issued over a particular tonne of bonded or inbound copper over the course of a year would be 10-30 times the value of the physical copper involved, depending on the LC duration.

In other words, the only limit on the amount of leverage, aka rehypothecation of copper, was limited only by letter of credit logistics (i.e. corrupt bank back office administrator efficiency), as there was absolutely no regulatory oversight and limitation on how many times the underlying commodity can be recirculated in a CCFD.... And gold is orders of magnitude higher!

Despite the uncertainty surrounding the actual leverage and recirculation of the physical, Goldman has made the following estimation:

We estimate, albeit roughly, that there are c.US$81-160 bn worth of outstanding FX loans associated with commodity financing deals – with the share of each commodity shown in Exhibit 23. To put it into context, the commodity-related outstanding FX borrowings are roughly 31% of China’s short-term FX loans (duration less than 1 year) .

Putting the estimated role of gold in China's primary hot money influx pathway, at $60 billion notional, it is nearly three time greater than the well-known Copper Funding Deals, and higher than all other commodity funding deals combined!

Under what conditions would Chinese commodity financing deals take place. Goldman lists these as follows:

  • the China and ex-China interest rate differential (the primary source of revenue),
  • CNY future curve (CNY appreciation is a revenue, should the currency exposure be not hedged),
  • the cost of commodity storage (a cost),
  • the commodity market spread (the spread is the difference between the futures
  • China’s capital controls remain in place (otherwise CCFD would not be necessary).

All of these components are exogenous to the commodity market, except one – the commodity market spread. This reveals an important point that financing deals are, in general, NOT independent of commodity market fundamentals. If the commodity market moves into deficit, or if the financing demand for the commodity is greater than its finite supply of above ground inventory, the commodity market spread adjusts to disincentivize financing deals by making them unprofitable (thus making the physical inventory available to the market).

Via ‘financing deals’, the positive interest rate differential between China and ex-China turns commodities such as copper from negative carry assets (holding copper incurs storage cost and financing cost) to positive carry assets (interest rate differential revenue > storage cost and financing cost). This change in the net cost of carry affects the spreads, placing upward pressure on the physical price, and downward pressure on the futures price, all else equal, making physical-future price differentials higher than they otherwise would be.

* * *

That bolded, underlined sentence is a direct segue into the second part of this article, namely how is it possible that China imports a mindblowing 1400 tons of physical, amounting to roughly $70 billion in notional, demand which under normal conditions would send the equilibrium price soaring, and yet the price not only does not go up, but in fact drops.

The answer is simple: the gold paper market.

And here is, in Goldman's own words, is an explanation of the missing link between the physical and paper markets. To be sure, this linkage has been proposed and speculated repeatedly by most, especially those who have been stunned by the seemingly relentless demand for physical without accompanying surge in prices, speculating that someone is aggressively selling into the paper futures markets to offset demand for physical.

Now we know for a fact. To wit from Goldman:

From a commodity market perspective, financing deals create excess physical demand and tighten the physical markets, using part of the profits from the CNY/USD interest rate differential to pay to hold the physical commodity. While commodity financing deals are usually neutral in terms of their commodity position owing to an offsetting commodity futures hedge, the impact of the purchasing of the physical commodity on the physical market is likely to be larger than the impact of the selling of the commodity futures on the futures market. This reflects the fact that physical inventory is much smaller than the open interest in the futures market. As well as placing upward pressure on the physical price, Chinese commodity financing deals ‘tighten’ the spread between the physical commodity price and the futures price .

Goldman concludes that "an unwind of Chinese commodity financing deals would likely result in an increase in availability of physical inventory (physical selling), and an increase in futures buying (buying back the hedge) – thereby resulting in a lower physical price than futures price, as well as resulting in a lower overall price curve (or full carry)." In other words, it would send the price of the underlying commodity lower.


We agree that this may indeed be the case for "simple" commodities like copper and iron ore, however when it comes to gold, we disagree, for the simple reason that it was in 2013, the year when Chinese physical buying hit an all time record, be it for CCFD purposes as suggested here, or otherwise, the price of gold tumbled by some 30%! In other words, it is beyond a doubt that the year in which gold-backed funding deals rose to an all time high, gold tumbled. To be sure this was not due to the surge in demand for Chinese (and global) physical. If anything, it was due to the "hedged" gold selling by China in the "paper", futures market.

And here we see precisely the power of the paper market, where it is not only China which was selling specifically to keep the price of the physical gold it was buying with reckless abandon flat or declining, but also central and commercial bank manipulation, which from a "conspiracy theory" is now an admitted fact by the highest echelons of the statist regime. and not to mention market regulators themselves.

Which answers question two: we now know that of all speculated entities who may have been selling paper gold (since one can and does create naked short positions out of thin air), it was likely none other than China which was most responsible for the tumble in price in gold in 2013 - a year in which it, and its billionaire citizens, also bought a record amount of physical gold (much of its for personal use of course - just check out those overflowing private gold vaults in Shanghai.

* * *

This brings us to the speculative conclusion of this article: when we previously contemplated what the end of funding deals (which the PBOC and the China Politburo seems rather set on) may mean for the price of other commodities, we agreed with Goldman that it would be certainly negative. And yet in the case of gold, it just may be that even if China were to dump its physical to some willing 3rd party buyer, its inevitable cover of futures "hedges", i.e. buying gold in the paper market, may not only offset the physical selling, but send the price of gold back to levels seen at the end of 2012 when gold CCFDs really took off in earnest.

In other words, from a purely mechanistical standpoint, the unwind of China's shadow banking system, while negative for all non-precious metals-based commodities, may be just the gift that all those patient gold (and silver) investors have been waiting for.  This of course, excludes the impact of what the bursting of the Chinese credit bubble would do to faith in the globalized, debt-driven status quo. Add that into the picture, and into the future demand for gold, and suddenly things get really exciting.

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novictim's picture

Just remember.  Gold only maintains a value in a well functioning economy/society.  In a post-catastrophe world then gold is just a soft metal not very good for making arrow heads.

When the shit hits the fan and our civilization folds, ask yourself: "How many pounds of gold buys me a juicy fat rat?".

I'm long on rats.

JohnnyBriefcase's picture

That's why I diversify my investments.

Gold, lead, copper, steel, brass.

knukles's picture

If the above is even reasonably accurate, and boy, oh boy, it connects a whole buncha dots for me, there are two very, very big risks sitting out there which cannot be ignored and will cause pure havoc when finally realized. (reality wise, somewhere past discovery and first notice ((bad pun, notice, did you notice))... sheesh)
First, there's an even bigger short in gold paper relative to real non-tungsten, salted, leaded, deliverable shiny than ever thought, much of it "wrapped up" in said CCFDs, and
Two, said CCFDs are one hell of a serious complex bit of financial engineering reeking with a veritable plethora of already rotting corpses of counter-party, rehypothecation, fraud and associated scam/ripoff risks to name but a few.

But, nonetheless, somebody somewhere in China is long a lot of phizz, good delivery phizz at that, that once the multiplicity of paper vs real ownership becomes moot to the point of he who has it wins (the ownership/99% rule) there could be one hell of a lot of
1.) gold in demand to satisfy "owners"
2.) losses as the fallibility of the complex financial engineering falls apart (Goldman been here?)

All this happening in an environment of the most egregious global monetary debasement in the form of excess fiat creation on record.

Y'all guess the consequences.

Many thanks, Tyler.  Well done.

DoChenRollingBearing's picture

Well written knuks!  You are very right, the Tylers put up a great article for this weekend´s reading.

NoDebt's picture

Agreed.  This is a seminal article regarding..... well, really, MONEY.  Unless I miss my guess.  

My take-away is that the "paper" market for anything of real value is the anti-matter of the actual thing of value itself- for a while.  Offsetting paper positions can be created to neutralize normal market forces until a certain point is reached when, fairly suddenly, the paper side of the equation disssolves and only the "real" side is left standing.  Who ACTUALLY owns it.  Posession being 9/10ths of the law, who possesses it at that moment, owns it (unless somebody else takes it by force).

strannick's picture

University of Zerohedge.

Somebody make a sweatshirt and put me town for 2.

Earlier I listened to Jim Grant waxing wistful on Henry Haszlit. Bliss.

kliguy38's picture

This deal was hammered out with Timmy G years ago when China agreed to hold our rotting Treasuries as reserves and the promise was made to get physical into their reserves. Much of the Yamashita hoard was divested from several sources (mainly bullion banks but some out of shadow stores) .. Geithner essentially made a deal with the devil so the Western Bankers could exit the petrodollar with as many real assets as possible.........leaving the peeps with paper prizes and broke......who cares after they get finished with the suckers........they have new killing fields to move into........

Soul Glow's picture

Remember when Geithner was laughed at in China?  This by Chinese students!

nope-1004's picture

Just remember:  Gold has served as a currency for over 2,000 years, before the printing press, before scripts and bonds, and before Christ.  If you think this little half-century experiment is unique or will heal itself, you haven't done any research.

Geithner's a moron.  He's been kicked out for a reason - beeker no good for the boss anymore.

Imagine any reputable government having a Treasury Sectretary that was accused of tax evasion.  Shows how corrupt Obama's gang really is.


I agree, good post ZH.  Makes complete sense and Koos Jansen also has said that he believes it to be China that caused the price to decline in 2013.


Squid-puppets a-go-go's picture

love goldman's take:

When china buys, the price of gold goes down.

When China sells, the price of gold goes down

hmmm ok, interesting dynamics. Hey goldman, shouldnt gold be $0 by now?

Squid-puppets a-go-go's picture

i also wonder if this debunks the not uncommon theory that the US and China had an 'agreement' to keep gold at wholesale so that china can accumulate phyz, as a form of compensation for the chinese surplus.

The theory is yet to be disproven, but this article shows how china may have done it without western consent/knowledge and has outsmarted the west at its own games.

serves them bloody right - given that the complexity of the financial sphere is a deliberate strategy to obfuscate fraud

its like if bernie madoff pulled the plug on his operation only to find his accountant had buggered off with the proceeds

GetZeeGold's picture



If you purchase or sell a dore bar in space....can anyone hear you scream?


Gold is anonymous....which is one of it's best properties.

FEDbuster's picture

In the end, I don't see letting all that physical gold flow out of their Country.  They tend to bail out every deal to keep the ship from sinking.  Holding on to the physical gold now parked in country seems like a no brainer.  Help cover the paper shorts and demand delivery of the physical to Ft. Knox, China.

Bendromeda Strain's picture

Why not - it's what the Owners would do, proven time after time. How's that working out for you Deutschland? How's that working out for you Venez.. err Chavez?

Pinto Currency's picture


The LBMA sees trading volume every day of 9,000 tonnes of gold before end of day netting-out between the bullion banks.

You can absolutely have as much of this gold as you wish as long as you don't want physical gold of size.  Load up on paper gold until you vomit.

Chinese appear to have said Fine - you guys want to run a racket in London and NY, go ahead.  We are going to source physical gold wherever we can before it blows up.


remain calm's picture

Anyone who trusts anything Goldman writes is a fucking idiot. They want your gold, and they want to buy it cheap. Fuckyou Goldman Sucks, may you die and burn in hell.

AldousHuxley's picture

 It looks to me as if our society is moving into a pre-revolutionary situation. (By that I don't mean a situation in which revolution is inevitable, but one in which it is a realistic possibility.) The majority of people are pessimistic or cynical about existing institutions, there is widespread alienation and directionlessness among young people.... Perhaps all that is needed is to give these forces appropriate organization and direction.


- Ted Kaczynski  '98

Tall Tom's picture

When China buys Physical it hedges the price by buying Naked Shorts on the Paper Market.


This is no different than any competent Coin Dealer Trade except on a much larger scale. That is why the Coin Dealer does not care about the Price Direction. His profit is locked in by the small premiums which he charges. That is how the Coin Dealer can afford to keep Gold in inventory. He hedges short on his inventory in the Paper Market.


China's shadow Bank Gold Dealers used the Gold as collateral to finance trade and hide the "Hot Money" flowing into the Shadow Banks. The owners of this collateralized  Gold insured themselves that even if there were a price decline in the inventory the increese in price of the Short Paper Position would net zero balance.


So Goldman Sachs is stating that the Chinese were naked shorting the market. I suspected that last year.


But I am not a Goldman Sachs apologist by any means. While some of the naked shorting of the Gold Market is attributable to the Chinese Shadow Financers I am not anywhere near convinced that most of the naked shorting of the Gold Market was attributable to the Chinese Shadow Financers.


April 12, 2013 and April 15, 2013 are dates which will live in infamy. However those takedowns were not a Chinese originated takedown. The Chinese were legitamitely HEDGING, using the Futures Market responsibly and to the purpose for which it was designed on a grand scale. There is absolutely nothing nefarious about the Chinese Shadow Financing operatives in that aspect.


JPM Chase and others, I believe, saw an opportunity to CRUSH the price of Gold. And that was the origination of the massive short sale postions on those two dates, either through subsidiary actors or directly by themselves.


Thanks Tyler Durden for publishing this article. It yields a clarity to what was mere supposition. But the only question which I have was that the policy of the Chinese Government was not to allow any Gold Exporting whatsoever.


But I guess that the Shadow Banking Financers are not too much different than our own regular Banking Criminals and act to violate the laws as they please for profits.


Stupid me. I was under the assumption that since there is a law that they will follow it, that somehow they are better. I am still trying to abandon that programming as I cognitively know better. But I am still in denial that violations happen. I guess that I think that violations happen only here and the rest of the World are saints...which is just not the case. People are the same Globally. Stupid me.


new game's picture

well stated tom. i remain sidelined to and til the great wooosh(xtrem patience-xp). then fiat in wheel barrow to a dealer(or backpack): i kid you not, p-hyz in person, no mail delivery acceptable. line may be annoying. the drive home will be a rear view mirror driving experience. may just go fishing with a shinny anchor:)

Bendromeda Strain's picture

Much like the preflash of a nuke, when you hear the Great Whoosh you have waited too long. The actionable whoosh already happened (2008). However, you should still be able to take your wheelbarrow of fiat to the nearest storm drain.

Soul Glow's picture

all growth happens in Darkness

Mold grows in the dark.  Most great plants grow in the light.

Oh regional Indian's picture

False. It's all about the roots (in the dark). No roots no tree.

How about humans? we are conceived and grow in darkness first. From the moment we come "out" we are dying.

Fecundity, a word that embodies creation and growth is a combination of warm, moist and dark.


Sam Clemons's picture

Always much deeper than that...Red light seems protective of the organism.  Blue light does not.

donsluck's picture

Huh? No leaves no roots either. 

Huh? I conceived my first borne outside in broad daylight.

Huh? We don't start "dying" (loss of muscle, slowing of healing) until around 35.

Fecundity depends on the species. Try growing cabbage where it's warm and dark.

In fact, "it's" all about BALANCE.

Soul Glow's picture

People have been shown to be able to keep their strength and endurence well into their 50's.

klockwerks's picture

69 and still pumping iron. Muscle never leave you just have to encourage it. PS, not crazy about it but need to be physically fit for what is coming. Put us old folks up front as we don't have anything to lose

Abitdodgie's picture

The biggest Gold mine on the planet is , wait for it ----The City of London , over a 1000 tons comes out of there every year and no one knows where it comes from.

FeralSerf's picture

"no one knows where it comes from."

It's captured (stolen) booty from all the wars and other grand thefts perpetrated by City's owners.

lasvegaspersona's picture

If just to hedge, why would China sell more futures than it buys physical?

Gold is down and that means that there was more selling than buying pressure. The paper gold market is HUGE. The physical market, even with China is tiny. This explanation has holes in it.

Stuck on Zero's picture

It's an absolutely brilliant strategy by the Chinese.  They get our gold with IOUs.  It circulates their currency so that it trades at a lower price benefitting their industries.  If anything goes wrong they walk away with our physical metal.  And what do we get?  Landfills full of Chinese crap.


prains's picture

Agreed, so the question is then, How are Goldman and JPM in on this fraud because where ever there's a financial fraud being perpetrated their alien slime can be found in the room....same as it ever was

Pinto Currency's picture


Not that we've sent any of our IOUs that are going to be worthless to the Chinese.

fockewulf190's picture

There has been some kickback against this article. I wonder what some of you, even the Tylers if they are still scaning this post, have to say about this rebuttle:

Ranger4564's picture


It's my understanding that the financial crisis of 2008 was precipitated by the Russians / Chinese, to stop the US $ from ravaging the globe any longer. The IMF 2010 treaty was the result of the negotiations. In the process, gold and other hard assets were promised, to convince the Chinese / Russians to keep the US debt. It's notable that gold / property / resources / productive capacity are all part of the asset pool... our labor. Slave?

Now that is the narrative on the national level. I believe that the banking cartel that is facilitating all of these national level transactions actually has its own agenda that is secretly being implemented without the nation's noticing. Destruction of the nations, banking cartels end up owning everything. Ultimately, we're going to have to cut off the head of the banking cartel to strangle the oligarchs.

Maybe the Chinese and Russians know this and are using the banking cartel to destroy them ultimately. I get the feeling the Chinese and Russians are not going to cooperate with the bankers as the Spanish, Dutch, Swiss, British, Portugese, Belgians, Americans have... the Chinese and Russians seem to be interested in building a more equitable global economy... an honest economy, not one of looting and exploitation that's historically existed.

We'll see, but keep your knife sharpened.

Squid-puppets a-go-go's picture

sorry, dude. China and russia did nothing to instigate 2008. The streetcar named desire race for yield/risk on dynamic of the merchant banks was the singular catalyst required

weburke's picture

the idea of independent nations making their own smart self interest decisions continues despite reality.

Pinto Currency's picture


The Fed running cheap money for more than a decade was the singular catalyst for the blow-up in 2008.

Tall Tom's picture

No. The Russians and the Chinese did not inflate US Property Values. That was pure domestic homegrown greed (pun intended).. They had nothing to do with the Financial Collapse of 2008


The failure of supposedly "prime" Mortgage Backed Securities, actually subprime and nonperforming, caused a major selloff. The collaterial of Banks simply became depleted, vanished, as the Bubble burst which caused Bank Balance Sheet Insolvency. US Bank Reserves went from Positive to an extreme Negative OVERNIGHT. It was one hell of a Cliff Chart. Since Banks could not trust other Banks, as they probably were insolvent, the Credit Markets froze.


And Credit Freeze II, caused by Chinese Bank insolvency due to a Chinese Housing Bubble is coming to a theater near you and opening very soon. That is what the collapse of the Shadow Banking in China will do. So have your popcorn ready and sit back. It promises to be a spectacular show.

SilverDOG's picture

... and the credit banking system balloon popped when the Central American and South American drug cartels demanded an inflationary adjustment... to their dollar washing. The only microcosm liquidity keeping Bankasauruses alive. Now its printing and Heroin, Afghanistan supplied.

Urban Redneck's picture

The Chinese & Russians did not start the financial crisis, but the Chinese commodity acquisition and hypothecation bonanza started soon afterwords. Since I'm in a self plagiarizing mood tonight (this would be the most recent post which touches on all the relevant aspects)...


The Chinese are probably laughing their asses off at the gold bugs placing bets on their game of follow the lady...

But if people insist on playing three card monte, here's some simple advice- STOP TRYING TO CHOOSE FROM AMONG THE CARDS YOU'RE BEING DELIBERATELY SHOWN.

There are more options than just PBOC or SAFE, and if one wants to go back to Chinese declarations and policy changes made in 2008-2009, it might be helpful to start by turning over the STATE RESERVE BUREAU card, you might find about a million tons of aluminum, several bukkake tons of copper, and even 200 tons of atomic number 49 (and this was before the Jim Henson show started pumping (not so) rare earth elements).

More important than the publicly disclosed items on the SRB shopping list is the breadth of effective "front companies" used by SRB to implement acquisition policy and how the execution of SRB policy by those companies feeds the bottomless rabbit hole of shadow banking/warehouse receipt/re-hypothecation/disappearing inventory/expat bureaucrat kleptocracy/ and accounting practices that would make Arthur Andersen proud.

The rabbit hole is so deep they can hide more gold in it than anyone can accuse them of hoarding. However, the 64 trillion dollar question is when they finally go to pull the gold out of their ass- do they retrieve a huge stash of good delivery bars, some of's finest counterfeits, or a single fortune cookie with a message that reads "You now be Corzined BEACHES!" in some bankster princeling's hand writing...

frank650's picture

The financial crisis was perpetraed by our own central bank and policymakers.  This is natural when you incentivize risk with low rates, cheap credit and implicit government backing of the secondary mortgage market.

X_mloclaM's picture

that was a great lecture

Soul Glow's picture

You mean I gotta finish it this weekend?

DoChenRollingBearing's picture

I just emailed the link to myself in case I do not re-read and understand this article before I get back to the states.

"Soul Glow" has the Central Bank DoChenRollingBearing´s endorsement  to finish this article as he sees fit.

seek's picture

Indeed, the article and Knuks' post are spot on.

It's long been my belief that when Au unwinds... it's going to be a crazy, crazy event.  This added information just supports the notion. I'm not holding my breath that it will happen any time soon, but I know it will eventually happen, and it will have people slack-jawed and saying WTF, and it will be on the covers of every financial and news magazine for weeks.

DoChenRollingBearing's picture



"...but I know it will eventually happen, and it will have people slack-jawed and saying WTF, and it will be on the covers of every financial and news magazine for weeks."

Another excellent comment.  At some point it´s going to get ugly.  But, I have been waiting a long time.  It gives me more time to prepare.

RockyRacoon's picture

If gold unravels as dramatically as discussed here, the event will be a footnote.  Think about it:  If gold goes stratospheric, the cost of a loaf of bread will be the headline of the day, not the price of gold.   This event will not happen in an economic vacuum.  Only then will the true role of gold become apparent to the financial elite, and I hope too late for them to partake of the bounty.