Wikileaks Discloses The Reason(s) Behind China's Shadow Gold Buying Spree

Tyler Durden's picture

Wondering why gold at $1850 is cheap, or why gold at double that price will also be cheap, or frankly at any price? Because, as the following leaked cable explains, gold is, to China at least, nothing but the opportunity cost of destroying the dollar's reserve status. Putting that into dollar terms is, therefore, impractical at best, and illogical at worst. We have a suspicion that the following cable from the US embassy in China is about to go not viral but very much global, and prompt all those mutual fund managers who are on the golden sidelines to dip a toe in the 24 karat pool. The only thing that matters from China's perspective is that "suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar's role as the international reserve currency. China's increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB." Now, what would happen if mutual and pension funds finally comprehend they are massively underinvested in the one asset which China is without a trace of doubt massively accumulating behind the scenes is nothing short of a worldwide scramble, not so much for paper, but every last ounce of physical gold...

From Wikileaks:



"China increases its gold reserves in order to kill two birds with one stone"


"The China Radio International sponsored newspaper World News Journal (Shijie Xinwenbao)(04/28): "According to China's National Foreign Exchanges Administration China 's gold reserves have recently increased. Currently, the majority of its gold reserves have been located in the U.S. and European countries. The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold's function as an international reserve currency. They don't want to see other countries turning to gold reserves instead of the U.S. dollar or Euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar's role as the international reserve currency. China's increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB."

Perhaps now is a good time to remind readers what will happen if and when America's always behind the curve mutual and pension fund managers finally comprehend that they are massively underinvested in the one best performing asset class.

From The Driver for Gold You’re Not Watching (via Casey Research)

You already know the basic reasons for owning gold – currency protection, inflation hedge, store of value, calamity insurance – many of which are becoming clichés even in mainstream articles. Throw in the supply and demand imbalance, and you’ve got the basic arguments for why one should hold gold for the foreseeable future.

All of these factors remain very bullish, in spite of gold’s 450% rise over the past 10 years. No, it’s not too late to buy, especially if you don’t own a meaningful amount; and yes, I’m convinced the price is headed much higher, regardless of the corrections we’ll inevitably see. Each of the aforementioned catalysts will force gold’s price higher and higher in the years ahead, especially the currency issues.

But there’s another driver of the price that escapes many gold watchers and certainly the mainstream media. And I’m convinced that once this sleeping giant wakes, it could ignite the gold market like nothing we’ve ever seen.

The fund management industry handles the bulk of the world’s wealth. These institutions include insurance companies, hedge funds, mutual funds, sovereign wealth funds, etc. But the elephant in the room is pension funds. These are institutions that provide retirement income, both public and private.

Global pension assets are estimated to be – drum roll, please – $31.1 trillion. No, that is not a misprint. It is more than twice the size of last year’s GDP in the U.S. ($14.7 trillion).

We know a few hedge fund managers have invested in gold, like John Paulson, David Einhorn, Jean-Marie Eveillard. There are close to twenty mutual funds devoted to gold and precious metals. Lots of gold and silver bugs have been buying.

So, what about pension funds?


According to estimates by Shayne McGuire in his new book, Hard Money; Taking Gold to a Higher Investment Level, the typical pension fund holds about 0.15% of its assets in gold. He estimates another 0.15% is devoted to gold mining stocks, giving us a total of 0.30% – that is, less than one third of one percent of assets committed to the gold sector.

Shayne is head of global research at the Teacher Retirement System of Texas. He bases his estimate on the fact that commodities represent about 3% of the total assets in the average pension fund. And of that 3%, about 5% is devoted to gold. It is, by any account, a negligible portion of a fund’s asset allocation.

Now here’s the fun part. Let’s say fund managers as a group realize that bonds, equities, and real estate have become poor or risky investments and so decide to increase their allocation to the gold market. If they doubled their exposure to gold and gold stocks – which would still represent only 0.6% of their total assets – it would amount to $93.3 billion in new purchases.

How much is that? The assets of GLD total $55.2 billion, so this amount of money is 1.7 times bigger than the largest gold ETF. SLV, the largest silver ETF, has net assets of $9.3 billion, a mere one-tenth of that extra allocation.

The market cap of the entire sector of gold stocks (producers only) is about $234 billion. The gold industry would see a 40% increase in new money to the sector. Its market cap would double if pension institutions allocated just 1.2% of their assets to it.

But what if currency issues spiral out of control? What if bonds wither and die? What if real estate takes ten years to recover? What if inflation becomes a rabid dog like it has every other time in history when governments have diluted their currency to this degree? If these funds allocate just 5% of their assets to gold – which would amount to $1.5 trillion – it would overwhelm the system and rocket prices skyward. 

And let’s not forget that this is only one class of institution. Insurance companies have about $18.7 trillion in assets. Hedge funds manage approximately $1.7 trillion. Sovereign wealth funds control $3.8 trillion. Then there are mutual funds, ETFs, private equity funds, and private wealth funds. Throw in millions of retail investors like you and me and Joe Sixpack and Jiao Sixpack, and we’re looking in the rear view mirror at $100 trillion.

I don’t know if pension funds will devote that much money to this sector or not. What I do know is that sovereign debt risks are far from over, the U.S. dollar and other currencies will lose considerably more value against gold, interest rates will most certainly rise in the years ahead, and inflation is just getting started. These forces are in place and building, and if there’s a paradigm shift in how these managers view gold, look out!

I thought of titling this piece, “Why $5,000 Gold May Be Too Low.” Because once fund managers enter the gold market in mass, this tiny sector will light on fire with blazing speed. 

My advice is to not just hope you can jump in once these drivers hit the gas, but to claim your seat during the relative calm of this month's level prices.

h/t Simon via TF Metals Report

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honestann's picture

In gold we trust.

Troll Magnet's picture

No.  In Gold They Trust.  We trust paper.  Oh well.  At least our food isn't made out of plastic.

nope-1004's picture

I trust any hard PM that can't be duplicated at the whim of some ponzi "policy maker".


Troll Magnet's picture

Well, yeah.  Some of us do (trust gold).  But most Americans are still asleep.  Hell, we might be in a coma!

doomandbloom's picture

Ben Fulford mentioned something like this in his blog a few days ago... Some secret meeting with 57 country finance ministers...i thought it was his imagination.

escargot's picture

Ben Fulford?  Oh yeah....the guy who claims he was told by secret ninjas that he would be made the Japanese finance minister, right? 

Yes, I think it might have been his imagination.

CubanCigar's picture

That and the shootout over the financial codes in downtown Tokyo the Yakuza told him about

Yen Cross's picture

Me likey a good Purple Punch!

BaBaBouy's picture


Bitchezzz ... 

Thats what should dominate your brains going forward, for a very long time indeed.

And it will Serve You Well.

jeff montanye's picture

thanks for letting me back on.  the current new yorker has an ad where some brokers have a gold brick thrown through their window and suddenly it's an ad for gld, with, of course, the bullion cachet.  my girlfriend and i laughed.  i said you know that stuff is not real gold, it's paper.  she just looked at me.  she is 80% silver miners (up a 100+%), 20% srs (bought at 17).   

Yen Cross's picture

The New Yorker?  You need to test drive a ( Bid to Cover ratio) ...> Non existant .

Arkadaba's picture

I like conspiracy theories as much as the next guy. And sometimes they even have credence. This Ben Fulford guy though - no. He was born in Canada and he seems to be an outright loonie (no pun intended).

Thomas's picture

All this money flow discussion is unnecessarily complicated. If gold is 0.15% of assets and it goes up to, say, 3% of assets, then it will appreciate 20-fold relative to those assets. Easy math. Now if it goes up to 5% of assets, not only is the math easy but my eyes start watering in earnest.

Solid Gold Bubble's picture

especially when you divide the number you get by 16 to get $3925/oz silver... 

High Plains Drifter's picture

fulford is the son of rich jews from new york. i believe he has some mental issues. he is a complete idiot and nobody should waste their time listening to this idiot. he lives in japan and he speaks japanese and i am not sure what he does for a living besides live off of his daddy's money....

Piranhanoia's picture

Which of the family is this one?  I hear they are all over the television and people want to know just everything. Are they really Houri's?  do you know?  do you want pictures?   swimsuit or with basketball jones?

sorry, sarc off.

Michael's picture

I heard a gold analyst on CNBC World asked the question;

Q; How do you know when gold is in a bubble?

A; When every guest on CNBC is recommending people buy gold.

Deadpool's picture

remain somnambulist. allow JPMorgan suppression. Allow us to buy AU and AG on the cheap. When they awake/when they are done suppressing the game is over and prices will be stratospheric.

trollin4sukrz's picture

Coma- hell most are totally fvkin brain dead. Dont even try to wake them either or u will be slammed with out  the respect of added grease. Makes for sore assholes.

Skid Marks's picture

the whim of some ponzi "policy maker".



Executive Order 6102


The Gold Confiscation Of April 5, 1933


DosZap's picture

Skid Marks,@ 18:39,

No one (in this day and age) is going to pay one iota of attention to any EO, or PDD, in regards to giving up PM's.


We know too much.

DoChenRollingBearing's picture

+ $1880 and green

Come and get it, bitchez!

Might get Pb at a high velocity first though...

spiral_eyes's picture

In my view, the real question is just how willing the Federal Reserve and U.S. Treasury will be to defend their massive gold holdings — after all, selling a big chunk of that "barbarous relic" at a higher price (let's say $3,000 or $5,000 an ounce) would go some way to paying down that huge crushing weight of fiat debt without having to resort to printing moneyLet's not forget that Bernanke's mentor, Stanley Fischer the head of the bank of Israel, presides over a central bank with zero gold reserves.

nuinut's picture

Zero declared gold reserves.

Long-John-Silver's picture

and lots of gold plated tungsten

Sokhmate's picture

more euphemismically known as salted gold (technically it is peppered tungsten)

iHanuka's picture

When I wrote that Israel hold no gold I based it few sources.
Bank Of Israel spokesperson, the world gold council data and Stanley Fischer's statements addressing the Israeli parliament.

Jendrzejczyk's picture

Would it be better for the Treasury to hold the gold, and tell the rest of the world that our gold is now worth $74,000 an ounce to back up all the airdollars we printed?

spiral_eyes's picture

I think that might be America's endgame... The Rebirth of the Dollar...