Gold, Bitcoin Soar After China Liquidates Most Reserves On Record To Defend Currency

Tyler Durden's picture




 

A little over two months ago, when official PBOC data revealed that not only had Chinese reserve outflow slowed down, but actually posted an uptick in October, we warned that "Capital Is Still Flowing Out Of China, Here's How Beijing Is Hiding It", in which we explained that in taking a page from the western bankers' playbook, the Chinese central bank had shifted to less "traceable" forms of currency manipulation, namely via "forwards". To wit:

Standard central-bank intervention to support a currency generally involves selling dollars and buying the home tender. In this case, China’s large state banks borrowed dollars in the swap market, sold the U.S. currency in the cash spot market and used forward contracts with the central bank to hedge those positions.

 

"If you can intervene without actually diminishing your reserves, it’s somehow viewed as better," said Steven Englander, global head of Group-of-10 foreign exchange-strategy in New York at Citigroup Inc. Such central-bank activity "may not look quite as dramatic as the sale of reserves, and they may prefer that optically," he said.

Since this form of FX intervention does not impact cash reserves and is not reflected in a change of underlying spot securities, China could intervene for an extended period and not show it, which is precisely what happened in October and November.

The problem is that this only works for a limited period of time, and only if the manipulation with synthetic instruments works. In this case it failed miserably as the latest collapse in the Chinese currency has demonstrated. It also means that sooner rather than later, the PBOC would be forced to revert to traditional, cash-based intervention.

And then came December.

As the PBOC revealed overnight, China’s foreign-exchange reserves plunged much more than forecast in December, capping the first-ever annual decline (of $513 billion) as authorities sought to prop up a weakening yuan. More importantly, the $108 billion decline from $3.438 trillion to $3.330 trillion - far greater than the $20 billion estimated - was the largest on record, and shows that while on the surface the Yuan was stable, behind the scenes the PBOC was furiously dumping securities to prevent an all out currency rout as outflows hit a record.

As a reminder, "liquidating reserves" is a financial euphemism for selling government bonds, mostly US Treasurys.

To be sure, the massive intervention explains the relative stability of the Yuan in November and December. However, it appears that the Chinese central banks has decided to stop intervening aggressively, if at all, in 2016. By now, everyone has seen the result: "the weakening of the fixing contributed to a selloff in stocks that led exchanges to close early on Monday and Thursday after the retreat triggered new circuit-breaker mechanisms. China’s CSI 300 Index plunged 7.2 percent Thursday."

More from Bloomberg:

"It’s inevitable: The PBOC is intervening, there are a lot of capital outflows, and the yuan is facing larger depreciation pressure," said Chen Xingdong, chief China economist at BNP Paribas SA in Beijing. "The PBOC now wants to maintain stability in the yuan index and not versus the U.S. dollar.”

 

The government will "allow for more depreciation, use reserves and tighter controls on cross-border capital flows," said Wang Tao, chief China economist at UBS Group AG in Hong Kong. The yuan will continue to decline against the dollar this year and foreign reserves will drop to $3 trillion, she said.

The paradox that China finds itself in is that as it devalues the currency in what it hopes is a controlled fashion, the FX outflows soar, forcing the PBOC to intervene and slow down the devaluation, leading to a self-defeating process in which China not only devalues far slower than it hopes, but results in an accelerated depletion of reserves. And once China's reserves decline by a few hundred more billion, that will be the time to panic.

 

Which brings us to this week: as Bloomberg adds, "the fact that the central bank cut the fixing so much this week signaled that the authorities are worried that the economy is challenged by increasing downward pressures," said Nathan Chow, a Hong Kong-based economist at DBS Group Holdings Ltd. "Considering the weak fundamentals, the long-term trend for the yuan to weaken and for the capital to leave the nation hasn’t changed."

Which means even more devaluation is in stock for China, which means even more reserve liquidation, which means even less dry powder to contain future outflows and out of control devaluation, all of which culminates into a great unknown, one which however does not have a happy ending.

So how are traders reacting?

Moments ago gold finally broke out above the $1,100 resistance level which so many sellside experts warned it would never be able to cross again...

 

... while that "other" currency, bitcoin, has soared by 5% overnight, not on some idiotic narrative about a Russian pyramid schemer's website, but because of what we first warned in September (when bitcoin was at $225): the more the Yuan devalues, the faster Chinese depositors will seek to circumvent China's capital controls and convert their increasingly less valuable money into either other currencies (via bitcoin), or into gold.

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Thu, 01/07/2016 - 09:20 | 7010129 I AM SULLY
I AM SULLY's picture

I will say this for bitcoin and other cryptos - they "might" be the way people escape sovereign fiats while people physically escape places like China.

(perhaps cryptos will be a great fugee currency)

Thu, 01/07/2016 - 09:24 | 7010161 Harlequin001
Harlequin001's picture

So who's buying the T Bills then, and what with?

Thu, 01/07/2016 - 09:26 | 7010178 I AM SULLY
I AM SULLY's picture

Since I believe this is a criminal scheme, not unlike the "economy" of the USSR during the 80's, I would not know - you'd have to talk to someone who isn't a low level peon slave monkey.

(but I suppose the FED could be secretly buying T-BILLs via some other intermediary)

(since we threaten the fuck out of people with murder if they don't obey)

Thu, 01/07/2016 - 09:28 | 7010186 VinceFostersGhost
VinceFostersGhost's picture

 

 

So who's buying the T Bills then, and what with?

 

I've got a full book of checks......want one?

Thu, 01/07/2016 - 09:31 | 7010204 I AM SULLY
I AM SULLY's picture

STAZHIT.COM buddy ...

(that's what I need from you)

(and a hug)

Thu, 01/07/2016 - 09:46 | 7010253 J S Bach
J S Bach's picture

I know this is not germane to the article, but I just calculated that the silver/gold ratio in fiat dollars is now over 78-to-1.   Incredible.

Thu, 01/07/2016 - 10:06 | 7010352 I AM SULLY
I AM SULLY's picture

That will unwind too.

Thu, 01/07/2016 - 10:07 | 7010361 stumbLebum
stumbLebum's picture

Best to unload silver now - it's going back to 100:1.

Thu, 01/07/2016 - 10:53 | 7010639 kill switch
kill switch's picture

it's going back to 100:1.

 

Why?

Thu, 01/07/2016 - 11:20 | 7010834 Citxmech
Citxmech's picture

Because somebody is a smart ass this morning.  Having said that, I'll be a buyer of Ag for a while longer. . .

Any bets on whether PM suppression can last another year?

Thu, 01/07/2016 - 12:02 | 7011090 summerof71
Thu, 01/07/2016 - 11:27 | 7010869 Bunghole
Bunghole's picture

Just another 2 week old troll

Thu, 01/07/2016 - 12:05 | 7011102 stumbLebum
stumbLebum's picture

Do you live under a rock? Slumping industrial demand.

Thu, 01/07/2016 - 13:28 | 7011737 badmoon
badmoon's picture

Slumping industrial demand for base metals will more than offset any lower demand for silver. Roughly 70% of silver mine production comes as a by-product of other primary metals output. Anyone that wants to check out the price for lead and zinc will see multiyear lows, and copper has just plunged below $2 for the first time in quite a while. There are quite a few base metals mines bleeding out their collective asses right now, with the inevitable closures, and this means a fuck ton less silver will be delivered to market. Just for example, Capstone reported last year it was scaling down production at its Minto Mine in Canada, and had put development on hold at its massive new development in Chile. Nevada Copper is struggling to continue building its Pumpkin Hollow mine in Nevada and put itself up for sale.

Mexico is the largest silver producing nation and its production has declined Y-O-Y by 6% and this too is largely a result of base metals output declining. But primary silver producers like First Majestic have annnounced they scaled back on production by choice to avoid blowing out reserves for what amounts to a break even operating environment. Endeavour Silver has also scaled back on operations.  Smaller producers like Impact Silver and Aurcana are barely keeping their mills running and burning through higher grade ore that will impair future operations.  Things in the US are not any better. Aurcana was forced to close their Shafter mine in Texas, a primary silver producer. The Troy mine in Montana, a copper-silver producer, was closed early last year.  A million ounces here, a million ounces there, and soon you have a lot less silver production worldwide.

This sort of thing is going on all over the world. Only the lowest cost producers are able to carry on while the metals are at these price levels. Higher cost mines are shutting down or scaling down and this will create a supply slump for many years into the future as these projects cannot just be flipped back on. Experienced geologists are retiring and leaving the sector for good.  Mine workers get laid off and find other jobs. 

Any of these fuckholes that show up to talk about silver surplus or bogus fundamentals that would account for this price level should be ignored. A historic die-off is underway among the silver producers from this extended slump that will take a decade or more to recover from. Silver supply is in deficit right now. Most of the silver demand for industrial fabrication is not going away, and the investment demand for silver has been climbing. US and Canadian mints reported record sales in 2015. India and China imported near record silver tonnage in 2015. The window to continue with a paper manipulation game is closing fast, and silver users will start a bidding war to get surety of supply from the few remaining producers that have been able to continue operating.

I doubt silver will stop at $50 for long when the rebound kicks off. I will not be surprised at all to see a triple digit silver price within a few years. There are quite a few shuttered mines that will make money at a higher silver price, but the delay will be 2-3 years before most of them can resume operations again. Only a sustained manipulation is preventing the recovery at this point, and the shorts are getting more and more exposed. There will be funds that blow up and fold when the scramble to cover sets in for real.  Pass the popcorn...

Thu, 01/07/2016 - 14:23 | 7012172 kill switch
kill switch's picture

+.35 at 1:21 PM EDT  $14.45 Slumping Demand,,,Under a rock??

Thu, 01/07/2016 - 09:27 | 7010183 Ghordius
Ghordius's picture

Belgium? with dollars, for sure

Thu, 01/07/2016 - 09:28 | 7010189 VinceFostersGhost
VinceFostersGhost's picture

 

 

Damn....those guys are loaded!

Thu, 01/07/2016 - 12:23 | 7011211 ThroxxOfVron
ThroxxOfVron's picture

Insurance, hedgies and retail took a big year-end bite.

It was time to take the money off the roulette wheel and run...

Thu, 01/07/2016 - 09:33 | 7010211 StackShinyStuff
StackShinyStuff's picture

If Francis Sawyer were here, he would say Joobux

Thu, 01/07/2016 - 10:08 | 7010370 stumbLebum
stumbLebum's picture

You can be the lead anti-Semite today.

Thu, 01/07/2016 - 09:46 | 7010259 Joe A
Joe A's picture

As Ghordius says: Belgium (?). Acting as an intermediary for somebody (FED?).

Thu, 01/07/2016 - 10:04 | 7010339 stumbLebum
stumbLebum's picture

America has a longstanding strong dollar policy, so virtually every other currency on the planet genuflects and quakes in submission to it. King Dollar didn't get that way by being cowed by other nations or their worthless currencies. America is that shining city on the hill. It's been that way since the early part of the 20th century and it won't be changing in any of our lifetimes.

Long live America!

Thu, 01/07/2016 - 09:21 | 7010132 cossack55
cossack55's picture

As a barbarian, I am much more attracted to gold.

Thu, 01/07/2016 - 09:36 | 7010222 bamawatson
bamawatson's picture

bitcoin sores

Thu, 01/07/2016 - 12:01 | 7011080 YouThePeople
YouThePeople's picture

do the sores hurt?

Thu, 01/07/2016 - 12:12 | 7011150 valjoux7750
valjoux7750's picture

Why all the negativity  with bitcoin?

Thu, 01/07/2016 - 09:21 | 7010133 DirkDiggler11
DirkDiggler11's picture

Buy Phyz Gold and Silver only ! If you can't hold it in your hand, you don't own it.

Thu, 01/07/2016 - 09:25 | 7010166 I AM SULLY
I AM SULLY's picture

(bingo)

Thu, 01/07/2016 - 09:43 | 7010245 garlansm
garlansm's picture

Amen!

Thu, 01/07/2016 - 09:26 | 7010169 Cognitive Dissonance
Cognitive Dissonance's picture

But....but....but the GLD prospectus says I own (a piece of) the underlying gold.

<They wouldn't lie.....would they?>

Thu, 01/07/2016 - 13:46 | 7011891 r3phl0x
r3phl0x's picture

They aren't lying - you do own it, but so do a few hundred other people who also don't physically possess it.

Thu, 01/07/2016 - 09:42 | 7010240 1stepcloser
1stepcloser's picture

buy rocks and own the world.  also can be thrown when ammo is exhausted 

Thu, 01/07/2016 - 09:23 | 7010147 buzzsaw99
buzzsaw99's picture

a mere $3.3T left. boo frickedy hoo. the usa treasury is bankrupt.

Thu, 01/07/2016 - 12:29 | 7011254 ThroxxOfVron
ThroxxOfVron's picture

At the present burn rate by this time next year between one third and half of it will be gone and their markets will have deflated in lockstep and ratio, several dozen people will have been hung, and the Politburo will be experiencing a whole new level of panic and frustration.

Thu, 01/07/2016 - 09:22 | 7010148 BandGap
BandGap's picture

If they have stopped intervening in the currency why don't they stop with the arrests? You can't do one and not expect the floor to drop out of the other, right?

 

Weeeeeeeeeeeee!

Thu, 01/07/2016 - 09:26 | 7010151 Ghordius
Ghordius's picture

remember when I wrote many times years ago that the time will come when we read about FX Reservesit has started. after years of writing: "not yet, not yet"...

the next chapter has begun

"Since this form of FX intervention does not impact cash reserves and is not reflected in a change of underlying spot securities, China could intervene for an extended period and not show it, which is precisely what happened in October and November. 

The problem is that this only works for a limited period of time, and only if the manipulation with synthetic instruments works. In this case it failed miserably as the latest collapse in the Chinese currency has demonstrated. It also means that sooner rather than later, the PBOC would be forced to revert to traditional, cash-based intervention. 

And then came December...."

Thu, 01/07/2016 - 09:33 | 7010210 Oracle of Kypseli
Oracle of Kypseli's picture

China should adopt the US dollar as their currency and keep prices of labor and goods low. Problem solved.

Thu, 01/07/2016 - 09:45 | 7010256 Ghordius
Ghordius's picture

up to a certain point, the strategy you are describing is exactly what they did, courtesy of that peg to the dollar

Thu, 01/07/2016 - 13:02 | 7011537 ThroxxOfVron
ThroxxOfVron's picture

^^^ So, WHY didn't that work indefinitely? ^^^

Did US Dollar/Yuan peg engender pricing transmission osmosis?  Did this osmosis actually moderate prices towards equalization between the two economic zones? 

What would this pricing equalization imply with consideration to the discrepancies in regulation, taxation, social services, etc., between the two economic zones?

Did deflation in the first world and inflation in the thrid world finally begin to meet?

Notice that a single currency was effectively shared via the market for securities with which to balance the ledgers of trade.  

US Bonds/Bills are used as collateral.   This is leverage.   Building the Chinese merchantilist economic zone was done with pyramiding of leverage which -just as in the US- cannot be re-paid from the proceeds of domestic production.

 

Thu, 01/07/2016 - 09:26 | 7010174 kamikun
kamikun's picture

This may be may favorite headline ever on ZH! Yes, please, BOTH gold and BTC appreciating in world curriencies and in the hearts of men... My virtual and in situ stacks couldn't be happier.

Thu, 01/07/2016 - 09:27 | 7010181 White Mountains
White Mountains's picture

Yep,  BitCoin = Freedom.  Learn how to use it.

Thu, 01/07/2016 - 10:01 | 7010321 NoBillsOfCredit
NoBillsOfCredit's picture

Every Bitcoin transaction is permanently recorded on the block chain.

Thu, 01/07/2016 - 10:14 | 7010398 Mine Is Bigger
Mine Is Bigger's picture

I fail to see your point. Is it supposed to be bad?

Thu, 01/07/2016 - 10:27 | 7010470 herkomilchen
herkomilchen's picture

It's bad.  But not nearly as bad as using a printable money.

Thu, 01/07/2016 - 14:29 | 7012218 Mashuri
Mashuri's picture

It's fun watching non-techies critique software -- something that can be developed and improved upon. Here's a nice little bite to chew on: https://lists.linuxfoundation.org/pipermail/bitcoin-dev/2016-January/012.... Many improvements like this are in the pipeline and will be merged.

For you non-geeks, this particular improvement is a way to obfuscate what amounts are being transferred. That's right, all transactions will still be permanently recorded in the block chain but all anyone (except the parties actually possessing the private keys to their transactions) will get to see are a bunch of garbled crypto in place of actual bitcoin balances.  Combine this with CoinJoin (already existing tech that obfuscates which addresses any particular transactions occur between) and bitcoin's fungibility very closely approches that of physical cash or gold.

Bitcoin is antifragile. The longer it exists, the stronger it becomes. 

Thu, 01/07/2016 - 09:29 | 7010192 RaceToTheBottom
RaceToTheBottom's picture

Bitcoins are probably being used as a way to transfer money out of China.  

Secondarily it might be used as a short term store of value, but I would guess just long enough to get to real stores of value like realestate , art and PMs.

Thu, 01/07/2016 - 20:07 | 7014216 mrees999
mrees999's picture

 

As the rate of new bitcoin being 'mined' into the program will drop to half sometime this summer - and the continuing explosion of non-currency uses of the same blockchain engine (used to create and verify every bitcoin) is very bullish. It then will further decline by a further half roughly every four years thereafter until the year 2140. Decreased Supply – increased Demand does what with price?

 

If you don't know about the over one hundred other use-cases for the blockchain  beyond currency - I recommend studying it. The blockchain is to oil what bitcoin is to gasoline. The latter are both derived from the basic fundamentals of the former. As many other use cases are found for oil (roads, plastic etc), many uses are being discovered from blockchains (persistent identity management - recording property titles, recording rights - voting etc etc.) 

There will be hundreds of thousands of blockchains eventually – but likely most will be pegged to the main chain which is the public chain backing bitcoin. It is now protected by the combined computing power well over 25 thousand times more powerful than the top 500 supercomputers combined – and growing exponentially.

Nobody wants to create a new blockchain that isn't proven and trusted as the bitcoin consenses (satoshi consenses) has already proven itself. They will likely not try to reinvent the trust wheel but will attach themselves to it for their own protection.  Creating a new blockchain from scratch is easy now we have a formula. The open source code of bitcoin gives a roadmap. But, getting people to trust one’s new blockchain without the network effects already provided by the main public blockchain (Bitcoin’s) is an entirely different matter as "experts" are still discovering. Online courses on blockchain are now available from major universities including Princeton.  Found on YouTube:

 

https://www.youtube.com/channel/UCNcSSleedtfyDuhBvOQzFzQ

 

Who will be the Rockefeller of this century?

Much to study.

Thu, 01/07/2016 - 09:29 | 7010196 daveeemc2
daveeemc2's picture

bullish!

Thu, 01/07/2016 - 09:30 | 7010197 Boing_Snap
Boing_Snap's picture

We're watching the Euro and the Yen carry trade come un glued, someone is bailing on the current manipulation game in a hurry. This type of action will crush the derivative market folks, watch for the mushroom cloud of hedge funds on the horizon.

Thu, 01/07/2016 - 09:40 | 7010234 cosmyccowboy
cosmyccowboy's picture

sum ting wong here!!!

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