The Chinese Are Buying Gold, Selling Treasuries - Should You?

Tyler Durden's picture

Submitted by Chris Hamilton via Econimica blog,

China has run a $4 trillion trade surplus with the US since 2000.  So, no shock China is the largest single holder of US Treasury debt (outside of the Federal Reserve) and has accumulated nearly a trillion dollars in US Treasury debt since '00.  In total, China now holds $1.24 trillion in US Treasury bonds.

Despite China continuing to run perpetually larger trade surplus' with the US, China ceased accumulating Treasury debt (net) in July of 2011 (coincident with the US debt ceiling debate...and the peak in Gold prices) and has been net selling US Treasury debt since.

Since July 2011, China has collected $2.2 trillion in US trade surplus dollars and recycled none of them (net) into US Treasury debt.  This after China recycled 50%+ of it's trade surplus into US Treasury's over the previous 11 years.  So what has China been buying with all those dollars since 2011?  Among other things, buying an awful lot of gold.  Perhaps as much as a trillion dollars worth since July 2011...and on this ongoing gold buying, perhaps 5,000 tons but even potentially in excess of 10,000 tons, gold prices have fallen by a third!?!  Conversely, on the buyers strike in Treasury's, yields fell by a third?!?

Typically when buyers disappear and new flow continues and existing stock is at record levels, prices fall and yields rise to entice new buyers.  However, in the case of US Treasury bonds, we are to believe that domestic sources of buying (US pensions, insurers, banks, etc.) have taken over buying since year end 2014.  Buying Treasury assets yielding far below domestics needed rates of return (essentially laddering into 0.5% to 2.5% yielding assets vs. 7.5% plan payouts)?  Where did these domestic sources get the $1 trillion without selling other asset classes?

Who Is Buying Treasury's?

The chart below highlights US Treasury issuance, by period, and what source purchased the debt.  Quite noticeably, the most recent period has seen a near abandonment of US Treasury debt accumulation by foreigners simultaneous with the Fed's cessation of net new QE.

The chart below focuses on the foreign portion of Treasury buying (total foreign buying called out) & breaks down the buying by grouping (Japan=blue, BRICS=red, BLICS=grey (Belgium, Luxembourg, Ireland, Cayman Islands, Switzerland), RoW=mustard, OPEC=black).

Noteworthy was the cessation of Treasury buying by the BRICS (those nations running dollar trade surplus') as of 2011...entirely replaced by the BLICS from 2011-->2015 (banking nations with little or no trade surplus with which to make the purchases).

The chart below highlights when QE began, rates rose during each period of QE and fell when QE was tapering or ceased.  Likewise, when China & the BRICS ceased recycling dollars into Treasury's in 2011...rates fell.  And when the Fed and the remainder of Foreign Treasury buying ceased since at year end 2014...rates fell even further?!?

Trade Surplus Recycling:

From 2000 to July of 2011, China ran average annual trade surplus' with the US of $180 billion and recycled about $90 billion annually or 50% of that surplus into US Treasury's.

During this time, gold rose $1400 or 650% (gold traded as high $1,911 and closed in excess of $1850 but the numbers shown below represent monthly averages).

Since August of 2011 to present, China ran record average annual trade surplus' with the US in excess of $300 billion and (on a net basis) recycled none of those record dollars into Treasury's.

What did the Chinese buy with all those dollars previously used to purchase Treasury's?  The data is pretty unequivocal the Chinese have been buying gold...assuming the same 50% of that surplus is utilized to buy gold from 2011 forward (instead of Treasury's) this is about $150 billion a year...and a $150 billion a year can buy a lot of gold.  Especially since the price of gold fell by nearly a 1/3rd since China began it's gold buying spree.

Since July of 2011, two of the largest and most important asset classes in the world, US Treasury debt and gold valuations, have been moving in contradiction to supply and demand data.  US Treasury rates have fallen by a third since the vast majority of previous buyers since have ceased accumulating... and gold has fallen about 25% on increasing physical demand.  These are simply not the hallmarks of a free market.  However, the only thing investors should be more afraid of than a free market correction or potential market crash is the absence of free markets... which appears to be the present situation.  Of course, this leaves so many open questions...

  • What will China do with their newly acquired large stockpiles of gold?
  • Is the US (or other large entities) actively and covertly helping to rig gold prices to help supply China with this gold?  If so, why?
  • Who is supplying all the gold which China is purchasing?
  • Who exactly is acquiring all the US Treasury debt since it simply isn't credible US domestic sources are doing so and the largest of buyers have all ceased buying?

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Captain Chlamydia's picture

Paper money is sooooooo 2015....gold is the old new money. 

beemasters's picture

Yes, barbarous relics are coming back into fashion.

archon's picture

As long as the Fed keeps buying them, it will be ok.  If the Fed thinks it's a good idea, then it must be - the Fed would never let us down...

Four chan's picture

i dont even know how to buy worthless paper.

0hedgehog's picture

Ya! Just like Homeland Security will protect the election process from those who would falsify results.

Captain Chlamydia's picture

Yeah,  or is it the New Old Money? 

0hedgehog's picture

It's worse than 2015, it's being put out of commisiion by the "cashless" community! The cashless followers know not what they do.

Butter-Cup's picture

My last pay check was $9500 working 12 hours a week online. My sisters friend has been averaging 15k for months now and she works about 20 hours a week. I can't believe how easy it was once I tried it out. This is what I do... https://tr.im/li1di9

Hail Spode's picture

Why, yes I should. 

Yen Cross's picture

  Paging Knuckles???  Would Knuckles please contact the Eccles hot line! ASAP

kliguy38's picture

I'll never sell my treasuries.........but gold is a relic and I'll never buy it......Paper is the best asset that electrons can buy!

tuetenueggel's picture

Yeah with paper you can wipe your aff and gold won´t burn in winter.

actionjacksonbrownie's picture

I think you have it backwards. I was buying Gold long before the Chinese caught the fever.

Raffie's picture

SC Bullion has $1.79 spot price on any quanity Silver maple Leaf coins.

They are almost giving away silver at these prices.

Yet, people still want to mock me for buying it and asking what brand tin foil I use on my hat.

At times will reply "I don't know the brand, but will ask your mom tonight when I come over."

Burticus's picture

It's SD Bullion.  Based on their spot price at top, the premium is only f1.79 and it does say for any quantity.  Their price of f10,660 for a monster box beats the best price anyone listed at https://comparesilverprices.com/ by f25.  I did not check whether SD charges for shipping, which you would expect on small orders.

jaxville's picture

  It is an excellent time to buy silver.  Dealers sales are down a bit but they are buying a lot from the public.  They probably paid spot across the counter for some of those monster boxes or their distributor is offering them at a loss to maintain their quotas.  Talk to your local dealer.  He probably has some excess inventory that he can sell for a reduced premium. 

  Most of those selling are not expecting a drop in prices.  They are selling out of necessity as their incomes decline along with the economy.  They must now draw on their savings.  A sad reflection of the real economic condition.

  Spoke to a refinery rep the other day.  They are not getting a whole lot more silver scrap in spite of the public selling.  The current excess of bullion product in the West is not making it's way back to refineries.  It is merely rotating into stronger hands.

  Back in the Spring of 2011 there was a glut of silver offered to the refineries.  So much so that many stopped buying.  Hedgers (users) knew of this and pulled their bids.  It was a cinch for those who run the markets to force the price down, 

   My rep actually asked for silver bullion as many of their clients sending in scrap would prefer bullion settlement rather than cash.  Consequently I am not very concerned about a serious decline in price. 

 

Latitude25's picture

Lol and the lower the gold price went, the more the Asians bought.

silverer's picture

It doesn't matter what you pay for gold, but that you have it.  And right now, anyway, it's still a bargain compared to what's to come.

Anopheles's picture

So, what happens when China starts SELLING all that gold? 

Nobody's thought that far ahead? 

Latitude25's picture

Sure I have.  It's a gold price where supply and demand are in equilibrium

BurningFuld's picture

All you have to do is aquire their currency and they will trade you gold for it. No they won't be taking USD. Simple as pie right?

Winston Churchill's picture

We'll never know, 'cause just like all the gold in Ft.Knox,it will never be sold.

Oh wait...

silverer's picture

That would be like selling new Ferarris for $1,000.00.  Why would they do that?

Yen Cross's picture

 

 China knows it's asses and elbows deep in debt.

   China has accumulated a substantial amount of US debt. They've also been a  NET seller of that debt in order to prop up the Yuan as capital outflows from China continue to accelerate.

  Chinas US debt portfolio has shrunken substantially, and if you look at their holdings, they're moving towards the shorter duration.

 Is China going to get that SWIFT alternative up and running this month???  That was the PBoC promise. lol

UnschooledAustrianEconomist's picture

China is in the same shit as all the rest, too. No winners, only losers.

Bay of Pigs's picture

The SDR goes live in October right?

bruno_the's picture
This Is Our Country, Our Airport need say more?
ChaoKrungThep's picture

They lost it once to smelly barbarians. Won't happen again. The US has feed the Dragon, which's getting hungrier and looking for weak prey.

debtor of last resort's picture

The window of opportunity
On which you can write on
During fogs and winters
In an eyeblink though
It will be gone
Without any scrutiny

Burticus's picture

These seeming perverted relationships and such creations as NIRP could only happen under a central banking enabled political oligarchy.

The market wouldn't let them happen in a free enterprise economic system using gold & silver money under the rule of law in a republic.

Obviously, ZeroHedge's sworn enemies, the central banking cartel & the gubbermints they own must be responsible for all this goofy $#!+.

lester1's picture

Since the Federal Reserve is not audited they have a covert stock and bond buying programme to prop up the market. The Federal Reserve is meddling and manipulating everything right now. Because there is literally nothing to stop them!

kiwimail's picture

I have long thought the Chinese are the ones manipulating the price of gold. Those huge dumps of paper gold into the market with no regard for paper losses could only be done by some one with very deep pockets. Those dumps serve to drive down the phys price so they can buy more phys at a lower price. The fed has to be aware of this and must be facilitating the process. Why?

BrownCoat's picture

Suppose the Fed wants to prop up the value of the USD. It would work through agents (like Too-Big-To-Fail banks) to dump paper gold in large quantities; basically, scare the speculators out of the market and drive the price of gold down. They lose millions of dollars doing this (on gold and silver exchanges). Ahhh, but there are trillions of dollars in circulation that are now pegged to the lower gold price.

Why does the Fed want a strong USD? Maybe to keep holders of US Treasuries and "euro dollars" happy. If all that QE money comes home, there might be an inflation problem. Fortunately [sarc], the socialist American economy has slowed the velocity of the money circulating in it. The Fed has new tools (circa 2008) to suck up the loose money sloshing around thereby preventing Weimar inflation. Sooner or later the Free Stuff has to end. My guess is that they can keep it going for a few more decades. I think this because the 1% have 95% of the economy's assets. These few will just be told to hold. The elites can't possibly spend it anyway since this economy doesn't produce all that much.

vega113's picture

No, this can't continue for decades. The savers can get punished only so much. The pension funds will start running out of money in 5-10 years, even assumming no recession will happen during this time.

 

Volaille de Bresse's picture

" The Fed has to be aware of this and must be facilitating the process. Why?"

 

Cause it gives the US (and the West) another semester of fresh air. Since 2008 it's been another semester plus another semester plus another semester...

 

I'm sure some guys up above are thinking "hey our crokked system's still alive? Thank you China"

0hedgehog's picture

China is in full control of the metals markets since the lion's share of western gold has been "migrating" east for a long time now and it is intentional. They seem to be in the process of moving the financial "power" to the east and leaving the US in tatters, a third world country. Trump, if elected, will put an end to the globalist's dreams. Help us ObiDon, you're our only hope!

Dark Daze's picture

ANd you think (as always with American's) that one man is going to save you? Stop looking for heor's and sharpen your blade.

alexcojones's picture

Would not be surprised if all those We Buy Gold Stores were really Chinese backed, created for the benefit of the Chinese buyers.

Muppet Fleecing Time in Murica!

Dark Daze's picture

So there's what, about 50 Trillion in total negotiable debt instruments denominated in US dollars out in the wild? Let's see Goldman, JPM and BAC swallow that, because they are going to have to.

truthalwayswinsout's picture

Buying gold for treasuries. That is exactly the wrong trade at the wrong time. As deflation hits gold will tank and be lucky to stay above $300. As deflation hits and negative interest rates appear, those treasuries will be worth a lot more money than gold.  A lot more. In fact, all those treasuries China owns are some of the best investments tney ever made.

Lost in translation's picture

Dennis Gartman advised me to sell all my PMs and buy bonds, lots of 'em.

I thought it might be unsound advice so just to be sure I wasn't making a big mistake, I called Paul Krugman, who told me to go ahead.

UnschooledAustrianEconomist's picture

Good advice from those fellas.

Wanna sell your PMs to me?

Lost in translation's picture

Downvoted.

I guess I need to add a /sarc tag next time...

ChaoKrungThep's picture

Any sentence with "Krugman" in it begs for a down vote.

Nexus789's picture

The Chinese must be loving the arrangement. Swapping inflated in value dollars for cheap gold as the price of physical gold is manipulated down. US economy is digging its own grave and then shooting itself in the head.

Goldilocks's picture

Zero Hedge: Deutsche Bank tries to explain why it failed to deliver gold as promised
http://www.gata.org/node/16723

BullionStar Perspectives: Chris Powell - The Gold Market is Manipulated
http://www.youtube.com/watch?v=kTX8DDQQmok (22:12)
BullionStar - Aug 1, 2016

missionshk's picture

what has me concerned is the the central banks are creating money out of thin air, and these are private groups that own the banks, and then they are taking thin air and buying assets, which they then own.   

 

in the case of the stock market, the bank of japan now is the largest owner of all companies..  the swizz are doing this but buying us stocks, and the foreign owners of the us central bank are now doing it in the usa..

in the converse, they are producing money out of thin air and paper air gold, forcing price manipulation, adding stock to the market that does not exist.  SELLING FUTURE THIN-AIR WITH WHAT DOES NOT EXIST, CURRENT THIN-AIR CREATED OUT OF THIN AIR

eventually all the assets in the world will be own by the people who create wealth out of thin air.........

that includes all the gold, which China is choosing to buy.  

this worries me, because all of the wealth is going into the pockets of the paper-from-thin-air producers.  real wealth is being bought with thin-air.

THIS CAN ONLY PRODUCE HYPER-INFLATION.

but Gold will hyper deflated..

 

jsgibson's picture

In hyperinflation, the holders of gold will not be trading it for thin air.

Sorry_about_Dresden's picture

He will be getting his head split open when he tries to use that gold to buy anything! I rather have rice.