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China's Gold Strategy

Tyler Durden's picture




 

Submitted by Alasdair Macleod via GoldMoney.com,

China first delegated the management of gold policy to the People's Bank by regulations in 1983.

This development was central to China's emergence as a free-market economy following the post-Mao reforms in 1979/82. At that time the west was doing its best to suppress gold to enhance confidence in paper currencies, releasing large quantities of bullion for others to buy. This is why the timing is important: it was an opportunity for China, a one-billion population country in the throes of rapid economic modernisation, to diversify growing trade surpluses from the dollar.

To my knowledge this subject has not been properly addressed by any private-sector analysts, which might explain why it is commonly thought that China's gold policy is a more recent development, and why even industry specialists show so little understanding of the true position. But in the thirty-one years since China's gold regulations were enacted, global mine production has increased above-ground stocks from an estimated 92,000 tonnes to 163,000 tonnes today, or 71,000 tonnes* ; and while the west was also reducing its stocks in a prolonged bear market all that gold was hoarded somewhere.

The period I shall focus on is between 1983 and 2002, when gold ownership in China was finally liberated and the Shanghai Gold Exchange was formed. The fact that the Chinese authorities permitted private ownership of gold suggests that they had by then acquired sufficient gold for monetary and strategic purposes, and were content to add to them from domestic mine production and Chinese scrap thereafter rather than through market purchases. This raises the question as to how much gold China might have secretly accumulated by the end of 2002 for this to be the case.

China's 1983 gold regulations coincided with the start of a western bear market in gold, when Swiss private bankers managing the largest western depositories reduced their clients' holdings over the following fifteen years ultimately to very low levels. In the mid-eighties the London bullion market developed to enable future mine and scrap supplies to be secured and sold for immediate delivery. The bullion delivered was leased or swapped from central banks to be replaced at later dates. A respected American analyst, Frank Veneroso, in a 2002 speech in Lima estimated total central bank leases and swaps to be between 10,000 and 16,000 tonnes at that time. This amount has to be subtracted from official reserves and added to the enormous increase in mine supply, along with western portfolio liquidation. No one actually knows how much gold was supplied through the markets, but this must not stop us making reasonable estimates.

Between 1983 and 2002, mine production, scrap supplies, portfolio sales and central bank leasing absorbed by new Asian and Middle Eastern buyers probably exceeded 75,000 tonnes. It is easy to be blasé about such large amounts, but at today's prices this is the equivalent of $3 trillion. The Arabs had surplus dollars and Asia was rapidly industrialising. Both camps were not much influenced by western central bank propaganda aimed at side-lining gold in the new era of floating exchange rates, though Arab enthusiasm will have been diminished somewhat by the severe bear market as the 1980s progressed. The table below summarises the likely distribution of this gold.

Gold Supply 31102014.jpg

Today, many believe that India is the largest private sector market, but in the 12 years following the repeal of the Gold Control Act in 1990, an estimated 5,426 tonnes only were imported (Source: Indian Gold Book 2002), and between 1983 and 1990 perhaps a further 1,500 tonnes were smuggled into India, giving total Indian purchases of about 7,000 tonnes between 1983 and 2002. That leaves the rest of Asia including the Middle East, China, Turkey and South-East Asia. Of the latter two, Turkey probably took in about 4,000 tonnes, and we can pencil in 5,000 tonnes for South-East Asia, bearing in mind the tiger economies' boom-and-bust in the 1990s. This leaves approximately 55,000 tonnes split between the Middle East and China, assuming 4,850 tonnes satisfied other unclassified demand.

The Middle East began to accumulate gold in the mid-1970s, storing much of it in the vaults of the Swiss private banks. Income from oil continued to rise, so despite the severe bear market in gold from 1980 onwards, Middle-Eastern investors continued to buy. In the 1990s, a new generation of Swiss portfolio managers less committed to gold was advising clients, including those in the Middle East, to sell. At the same time, discouraged by gold's bear market, a western-educated generation of Arabs started to diversify into equities, infrastructure spending and other investment media. Gold stocks owned by Arab investors remain a well-kept secret to this day, but probably still represents the largest quantity of vaulted gold, given the scale of petro-dollar surpluses in the 1980s. However, because of the change in the Arabs' financial culture, from the 1990s onwards the pace of their acquisition waned.

By elimination this leaves China as the only other significant buyer during that era. Given that Arab enthusiasm for gold diminished for over half the 1983-2002 period, the Chinese government being price-insensitive to a western-generated bear market could have easily accumulated in excess of 20,000 tonnes by the end of 2002.

China's reasons for accumulating gold

We now know that China had the resources from its trade surpluses as well as the opportunity to buy bullion. Heap-leaching techniques boosted mine output and western investors sold down their bullion, so there was ample supply available; but what was China's motive?

Initially China probably sought to diversify from US dollars, which was the only trade currency it received in the days before the euro. Furthermore, it would have seemed nonsensical to export goods in return for someone else's paper specifically inflated to pay them, which is how it must have appeared to China at the time. It became obvious from European and American attitudes to China's emergence as an economic power that these export markets could not be wholly relied upon in the long term. So following Russia's recovery from its 1998 financial crisis, China set about developing an Asian trading bloc in partnership with Russia as an eventual replacement for western export markets, and in 2001 the Shanghai Cooperation Organisation was born. In the following year, her gold policy also changed radically, when Chinese citizens were allowed for the first time to buy gold and the Shanghai Gold Exchange was set up to satisfy anticipated demand.

The fact that China permitted its citizens to buy physical gold suggests that it had already acquired a satisfactory holding. Since 2002, it will have continued to add to gold through mine and scrap supplies, which is confirmed by the apparent absence of Chinese-refined 1 kilo bars in the global vaulting system. Furthermore China takes in gold doré from Asian and African mines, which it also refines and probably adds to government stockpiles.

Since 2002, the Chinese state has almost certainly acquired by these means a further 5,000 tonnes or more. Allowing the public to buy gold, as well as satisfying the public's desire for owning it, also reduces the need for currency intervention to stop the renminbi rising. Therefore the Chinese state has probably accumulated between 20,000 and 30,000 tonnes since 1983, and has no need to acquire any more through market purchases given her own refineries are supplying over 500 tonnes per annum.

All other members of the Shanghai Cooperation Organisation** are gold-friendly or have increased their gold reserves. So the west having ditched gold for its own paper will now find that gold has a new role as Asia's ultimate money for over 3 billion people, or over 4 billion if you include the South-East Asian and Pacific Rim countries for which the SCO will be the dominant trading partner.

*See GoldMoney’s estimates of the aboveground gold stock by James Turk and Juan Castaneda.
**Tajikistan, Kazakhstan, Kyrgyzstan, Uzbekistan, India, Iran, Pakistan, and Mongolia. Turkey and Afghanistan are to join in due course.

 

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Mon, 11/03/2014 - 20:35 | 5408859 takeaction
takeaction's picture

I really think we are at a bottom again for gold.  And a top for this market.  It will not hit 18,000.  No way.  Fun week boys...grab your ass.  It hurts.  THe bizzaro world continues...

Mon, 11/03/2014 - 20:39 | 5408867 HedgeAccordingly
HedgeAccordingly's picture

marc Faber loves gold.. hates japan.. echo . echo - http://hedgeaccordingly.com/2014/11/marc-faber-japans-bond-buying-progra...

Mon, 11/03/2014 - 21:10 | 5408963 OceanX
OceanX's picture

Good interview, Chris Martenson -> Ted Butler: https://www.youtube.com/watch?v=i0fRCu1PDsA

Mon, 11/03/2014 - 22:30 | 5409192 Rememberweimar
Rememberweimar's picture

OF COURSE the Jew are printing themselves Trillions of dollars worth of GLD...

WOULDN'T YOU...

Tue, 11/04/2014 - 08:04 | 5409875 SAT 800
SAT 800's picture

The Gold price chart for world wide spot is very impressive today. It's gotten back to where it was on Sunday; it  went up vertically this morning in London; with the usual firm support in Hong Kong overnight. So basically it had one down day followed by a recovery.

Mon, 11/03/2014 - 20:37 | 5408861 silverserfer
silverserfer's picture

whats this goal'd crap you talk'n bout? Hey monday night footbals on in a few yeeeeeeeee haaaaaaaaw!

Mon, 11/03/2014 - 20:41 | 5408870 alexcojones
alexcojones's picture

The Best reason to buy gold & silver?

Because the PTB & scum MSM don't want you to own any.

Mon, 11/03/2014 - 22:08 | 5409119 Acidtest Dummy
Acidtest Dummy's picture

Because, if in the future some use is discovered for it there will be no faking it.

Mon, 11/03/2014 - 23:29 | 5409399 TheReplacement
TheReplacement's picture

You mean like xrays, circuit boards, wireless antennas, speaker cable jacks and any other application that requires maleability, conductivity, and/or ability to remain untarnished?

Mon, 11/03/2014 - 20:47 | 5408874 SilverIsMoney
SilverIsMoney's picture

I don't see this as a bottom and I think we still got some more pain to endure, I also cannot guess how long this will last, but I for one will never sell and never stop stacking because the end game to this is obvious to anyone paying attention. Gold can go to $950 and retrace a full 50% from the 2011 top but I'll buy all the way down, bloody hands and all, even if it goes lower than that.

 

Buy set amounts every month, make it apart of your monthly budget, and forget about it...

Mon, 11/03/2014 - 20:55 | 5408914 JenkinsLane
JenkinsLane's picture

My left nut knows more about the future price of gold than James Turk.

Mon, 11/03/2014 - 21:02 | 5408936 Ignatius
Ignatius's picture

So do we direct our questions to it, or to you?

Mon, 11/03/2014 - 21:11 | 5408969 JenkinsLane
JenkinsLane's picture

Given that James Turk knows nothing about the future price of gold, my left nut knows slightly more than nothing.

If I were you I would not listen to either. Try Trader Dan instead:

http://traderdannorcini.blogspot.com

 

 

 

Mon, 11/03/2014 - 21:54 | 5409086 Charles Nelson ...
Charles Nelson Reilly's picture

James Turk bang your wife or something?

Mon, 11/03/2014 - 23:19 | 5409360 JenkinsLane
JenkinsLane's picture

No, I just dislike charlatans. Funny question though.

Mon, 11/03/2014 - 23:57 | 5409433 SoilMyselfRotten
SoilMyselfRotten's picture

He banged mine, that bastard(no pun intended)

Tue, 11/04/2014 - 07:09 | 5409807 LULZBank
LULZBank's picture

Its for the children.

 

Irish priest calls on church to sell gold to pay for children's education

http://www.irishcentral.com/news/education/Irish-priest-calls-on-church-to-sell-gold-to-pay-for-child-education.html

 

Tue, 11/04/2014 - 04:24 | 5409736 centipede
centipede's picture

Right, try Trader Dan instead. That's the guy who is always right. In 2012 when gold was at the top he was talking about gold as a safe haven, honest money and ridiculing those who were trying to talk gold down. Now he is right again. Gold is the worst crap and all those charlatans and conspiracy lunatics are trying to peddle it to innocent public.

How can he be so right all the time? That's amazing. When gold is up it is a good investment, when it is down it is a bad investment. But wait a second, shouldn't it be actually the other way around? Buy low sell high?

 

Tue, 11/04/2014 - 06:20 | 5409770 Quinvarius
Quinvarius's picture

Trader Dan and Keith Weiner are symptoms of the current gold market.  Every stacker has been saying the whole time to avoid paper because it is manipulated and quite likely going to zero.  But these guys can't accept that.  They insist it is a real market and a pure market, despite all the evidence.  They have to be right and the market has to be real, because that makes them smarter for more intelligent and skillfull reasons.  Anything less than that would take away from their great talents.   It makes them smarter than the stackers who suspect the CME is going to melt down like the HKMEX did and would never touch paper in the first place.  I keep seeing all the smug back patting among that crowd and I suspect it is a symptom of paper gold bottom.  No matter what they say, they are only selling because of crowd momo.  It is the same reason they bought leveraged paper at highs.  Everything they say is justification for being in the herd.  The reality is that gold and silver have never in history been cheaper vs government paper.  Stocks and debt are overpriced and gold is underpriced because that is government CB printing press backed policy.  I am quite happy to take the subsidized gold and silver while it remains tethered to paper.  Dan and Keith can make up all the reasons they want, and point out all the ratios they want, on why stackers are idiots or wrong.  And I will fire right back that all the messed up historical ratios and paper pricing are not indicating a bear market is gold, as much as a bear market in market trust and contract law.  A gold bank run is the oldest kind of bankrun in history.  What is a COMEX gold contract but the currency of older days when private banks issued their own money vs private gold deposits?  How are those old banks defaulting and their private currency becoming worthless any different than what would happen at the COMEX?  How is this never going to happen again?  All the numbers and evidence suggest it is happening.  It just happened in Hong Kong a couple years ago.  I will take the real gold.  And if the COMEX survives, and gold is priced correctly, maybe it will turn into a trade some day.  But it is no trade now.  It is knowing the way of things. 

Tue, 11/04/2014 - 06:58 | 5409805 Dugald
Dugald's picture

My left nut knows more about the future price of gold than James Turk.

So, which Nut should we talk to?

Mon, 11/03/2014 - 20:55 | 5408916 MxBonanza
MxBonanza's picture

And still it is below $1,200.

This fuckers do know how to control prices and their porpaganda spell is doing fine. Now they got another trick out of the hat and started a phantom QE via Japan and the ¥ creation.

They still have more of those magician tricks, and I would not be surprised if they push those worthless metals lower.

People are not getting smarter, and are amazed on how well the stock marked recovered after the "healthy" decline weeks ago.

Mon, 11/03/2014 - 21:00 | 5408943 lasvegaspersona
lasvegaspersona's picture

Paper gold selling could drive the price toward zero. At the same time this will probably only encourage the purchasing of physical by those with a 'genetic' understanding of real wealth. At some point, when the price get low enough not another ounce will be offered and the 'gold market' will have broken.

At that point all the fools in paper gold products will get their cash at the very moment when cash is the very last thing they want.

Be smart, insist on the real stuff.

When the market resumes as a physical only market, then we will see a real price of gold much closer to its true value....and if you are wondering why the market will resume...well you should probably ask yourself what you really know about the role of gold.

Just because 1971 happened and Nixon told the world that paper was just as good as gold don't think the rest of the world listened. People act on short timelines. Institutions, especially those of major producers without the need to ever spend any of their wealth, the true financial giants of the planet, can make decisions that will benefit their clients for generations in the future. Such is the real role of gold.

Mon, 11/03/2014 - 21:17 | 5408980 besnook
besnook's picture

how much gold do you need to legitimize your currency in the international market? not much. i would guess a coupla time projected current account deficit on a rolling settlement date sort of thing to keep everyone honest. rather simple really becaause it is in everyone's but the bankers' interests to comply.

Mon, 11/03/2014 - 21:19 | 5408989 p00k1e
p00k1e's picture

How much more time will the Chinese take to form this strategy?  If they haven’t figured it out by now, they never will….. or it’s hype.

All those people have to do is, peacefully pack their shit on to rickshaws, grab some high-end skiing apparel from the factory, head across the Bering Strait into Alaska, make a right turn through Canada then ease on down the Pacific Coast Highway settling in the New Land.  Who’d stop them? 

The Russians gave the Chinese a right of way. 

Mon, 11/03/2014 - 23:34 | 5409407 TheReplacement
TheReplacement's picture

Why should they be in a hurry since they seem to have the precious and the west is busy grinding itself to hamburger?

Mon, 11/03/2014 - 22:37 | 5409220 gwar5
gwar5's picture

Strong dollar, weak gold = great time to exchange USD for gold oz.

Tue, 11/04/2014 - 17:07 | 5412027 MeelionDollerBogus
MeelionDollerBogus's picture

Strong dollar? When did that happen?

pricing fiat vs fiat in the "dollar index" is a fraud.

Commodities may be cheaper in dollar terms short-term only but not all of them. The dollars for working hours & working hours vs LIVING time are decreasing.

Mon, 11/03/2014 - 22:57 | 5409302 Bemused Observer
Bemused Observer's picture

Getting your people to buy gold allows you to consolidate a lot more within your borders without having to lay out the funds yourself.
If you are the type of leader who thinks he can confiscate from his people if needed, it would be a sensible strategy.

Tue, 11/04/2014 - 00:23 | 5409491 Rakshas
Rakshas's picture

.....maybe I'm just becoming an old fuck or something, not an old fart and not an old man but an old fuck ..... but I remember when fundamentals actually mattered - I know I know but it was easy to understand; supply demand, (market price - production costs = profit (EBITDA for you pedantic fucks) ........ I'm getting old... or .....perhaps..... this bizarro inverted market world is getting old either way the math just doesn't seem to be so simple anymore; fundamentals  seems to be a four letter word to most these days.....

At any rate.... a question for all the PM haters out there in Zero land: Can you work out the math that sets the price of Gold/Silver below the cost of production then justify how converting relatively worthless FRN's into said PM's is flawed?? Now that I would be interested to see before I become a smelly stain on the living room carpet....

and by way of I don't give a shit type disclosure I buy silver because I want gold....... GSR bitchez ..... no I don't mean that stuff that gets on an officers hands and clothes at a routine traffic stop these days...... 

Tue, 11/04/2014 - 00:53 | 5409554 I Write Code
I Write Code's picture

Yahbut here's a thing, China has bought a lot of gold in the $1200 to $1800 price range, and now that it's falling CNBC (!) says they are starting to pull back on purchases, see it falling further.  Chinese culture apparently believes capital is a wasting asset, but this is ridiculous.

Tue, 11/04/2014 - 04:25 | 5409738 Rememberweimar
Rememberweimar's picture

So now suddenly CNBC is a news source...

Tue, 11/04/2014 - 02:19 | 5409660 hedgiex
hedgiex's picture

It is a fact that China has been buying gold to diversify its huge reserves. It is a spin to conclude that China is positioning to influence gold prices. China has other priorities mending implosion from internal debts and the ongoing currency war that Japan has fired.

 

Tue, 11/04/2014 - 04:09 | 5409717 fredquimby
fredquimby's picture

SWISS GOLD UPDATE:

I just saw my first full size bus shelter GOLD INITIATIVE YA!! poster on the way to work (in Switzerland) this morning!

:))))

Tue, 11/04/2014 - 05:52 | 5409776 Apostate2
Apostate2's picture

It is of some interest that the Shadow Banking sector in China is now being backstopped by the Central Goverment despite protestations that they are vigorously trying to unwind that sector. It would seem that the challenges to the planned economic policies need to be bolstered not unwound. Trouble ahead and gold will not save them. 

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