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:

3. CHINA'S GOLD RESERVES 

 

"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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EL INDIO's picture

Hi Everyone,

This my first post here.

I'm a PM investor and I'm very sad to see Gold do what it is doing.

I don't understand how come PM investors are happy to see them go up so quickly !

The only people for which this is good are retired people with sizable holdings who no longer earning and traders.

Investors should be pissed, because they'll get a lot less for a lot more money.

No offence to Gold lovers but I hope we'll get a 40% correction in the near future, that would be awesome.

malalingua's picture

another way to look at this is that gold isn't necessarily going up but that the dollar is going down. 

Temporalist's picture

Only based on charts that is correct but because of the suppressed demand, negative propaganda and open assault, new available demand from whole populations (some like Russia and China until recently prohibited from owning gold), new vehicles like ETFs, central bank purchases...it is surprising that it hasn't gone up farther and faster to me.  Silver also has gone up fast and far but I think it should be higher.  People also mention that the corrections in both gold and silver are less and shorter in duration as well.  Perhaps there are fundamentals that you aren't considering.

Inibo E. Exibo's picture

Welcome aboard.  I'm a relative newbie mself.  I've only been reading ZH for about 6 months.  

I tend to agree about the big spikes up.  They are exhilerating, but also deceptive.  I'm in it for the long haul, though.  Regardless of where it is today it is going to be more valuable next year compared to everthing else (except maybe silver).  I know there are a lot of people who say they can't afford gold.  I was one of them.  Eventually it just became obvious once I finally grasped that we are in the fiat fractional reserve central bank debt money end game. I couldn't aford it, but I cashed out of my 401-k and into PMs anyway.  As someone said futher up this thread, we are all going to lose.  The trick is to lose as little as possible.  I intend to come through this with as much of my wealth--meager as it is--intact as possible.  I don't have many years left, but I do not intend to spend them living out of a shopping cart.

malalingua's picture

it's not about losing it's about protecting and maintaining value.  Not sure when you cashed out your 401k but I am sure the penalties that you paid  have been recovered with your pm gains.  I am trying to get family and friends to do the same but unfortunately these people listen to their financial advisors and take zero responsibility. 

IronShield's picture

LOL  You gotta be kidding!?  

"I don't understand how come PM investors are happy to see them go up so quickly !"

"No offence to Gold lovers but I hope we'll get a 40% correction in the near future, that would be awesome."

So you missed the gold train and are begging to get aboard?  Man, take that hat somewhere else; no "Gold lover" feels for ya...

MoneyWise's picture

*LOL* of course... Leave another 30 years, learn and comeback

to talk about it.. here is your MOMO train:

http://img402.imageshack.us/img402/3118/trainwx.jpg

Keep riding it..

IronShield's picture

Yeah, well, them don't look like no "Gold lovers" to me.  Late to the party, clingons, lumpenproletariat, what have you...  Us "Gold lovers" be in the club car; but you wouldn't know about that.  Please, let me get onboard...  I promise not to disparage that most precious of metals.  No son, keep shoveling that coal...  Bullshit flag thrown again...

Oh, and corrections?  Yawn, been there done that; since 2002.  Buying ever since.  Same for *gasp* silver.  And talk about corrections there...  curl your freakin toenails...  so what...  Rich motherfukker...  And we ain't close to done yet; go scare some other kiddies with your crap...  cost average in and you will be fine; don't try to time it, you won't win that way in this motherfukker of ALL bull markets; ride that all the way...  to FOFOA's projections...

 

MoneyWise's picture

"Yawn, been there done that; since 2002." ha-ha-ha,

Hope you got good harvest there on your farm, redneck.

Keep counting your 10oz of Gold at night, like a Scrooge.. :)

 

IronShield's picture

Nuff said...  You're a poser, nothing more, much less...  Yeah, redneck...  If that means far beyond your means, then yes, I can live with that.  Too bad you missed the boat; no, not really.

MoneyWise's picture

Good, Thanks a lot, have nice holidays.

MoneyWise's picture

"another way to look at this is that gold isn't necessarily going up but that the dollar is going down. "

Going down against what? Give me an example to justify

400$/oz move from July 1550 price.. 25% + move is based on

Dollar devaluation? Or 25% inflation? What are you smoking?

This trade completely emotional and have no ground what so ever,

(Other than hope on EZ collapse and US banks default) and

ones stress is off, 500$/oz will be retracted from actual price.

I do see gray hair on your avatar, but I think you are still 18 yo,

pap's..

malalingua's picture

"going down against what"?  Seriously, what are you inhaling?  I appreciate the compliment of being '18' I was also accused of being '25' too.  The 'gray hair' is Ron Paul, though I am sure someone like you wouldn't appreciate someone like him because he doesn't appeal to neomaxizimdweebies.  I would love to post links refuting you but I feel it would be a waste of time since it appears you either are a financial advisor/bankster or a puss-cake, neither of which I like to spar with because the results are the same.  So go back to your wine cooler and enjoy your Paul Krugman book. 

geekgrrl's picture
This is an interesting cable.

http://cables.mrkva.eu/cable.php?id=145596
"SUBJECT: Fake Gold found at Ethiopia's Central Bank
2. The saga began on December 7, 2007 when the Ethiopian Federal
Police announced the arrests of four NBE employees. A random check
conducted on gold reserves in NBE's vault had found that 96.5
million birr worth of "gold" bars were actually gilded steel or
stone. In the past, NBE sent its gold to Switzerland to be
inspected and verified. However, in 2005 the responsibility shifted
to Ethiopia's Ministry of Mines and Energy (MME). "
MoneyWise's picture

The only thing which keeps demand "so high" Gold ETF's

"Gold exchange traded funds were down 2% Wednesday morning following the previous session’s steep pullback as the precious metal corrects following a run above $1,900 an ounce.

Gold holdings in exchange traded products declined for a third day on Tuesday and the most since January as bullion holdings slid 24.8 metric tons to 2,181.6 tons, Bloomberg reported. Assets climbed to a record 2,216.8 tons on Aug. 8.

Investors pulled almost $1.5 billion from SPDR Gold Shares "

If you think GOLD trade is GUARANTEED Income

without risk? Please Reply.. :))) Otherwise, I don't understand

why would everyone just buy GOLD here and collect 20-40% yearly

with no risk..

Use of Weapons's picture

Counter-point: two major tech IPOs have been pulled recently [Groupon / Zynga] due to concerns over revenue & behaviour of investors / major shareholders.Other major plays [MS / Skype, Google / Motorola] look to be strategic plays in the ever-more-vicious mobile patent wars [http://www.idownloadblog.com/wp-content/uploads/2011/08/Reuters_Patent_C...].

Silicon Valley VCs aren't happy, and I'm doubting that the 'entrepreneur' revolution has any real long term ability to upturn the economy. Tech 2.0 looks set to implode.

 

This hasn't been costed in yet, and even Apple's invincible pedestal means little if both China & Brazil go into downturn [which looks likely]. i.e. people counting on BRIC & globalisation 3.0 aren't looking too green at the moment.

 

Feel free to add your own counters, but that's what I'm seeing at the moment.

gwar5's picture

Well, we knew China was hoarding gold as a strategic weapon and, likewise, the Western PTB were doubling down on fiat through mutual assured debasement. And we at ZH knew that they each knew. What's new is that it's now out in the open, and it's time to get serious, and it's on like Donkey Kong!!

 

Institutional investors are going to feel pressure to buy gold, now, and to disregrad any previous market manipulation directives from the Chairsatan so they can save themselves. 

Donkey Kong, Bitchez!

 

 

geekgrrl's picture

Another interesting cable discussing a very deep gold mine in South Africa. Note the massive energy requirements:

http://cables.mrkva.eu/cable.php?id=27289

"At 2890 meters, virgin rock temperatures are 50 degrees
centigrade. To maintain comfortable work conditions, cooling
is provided by 10 MW of site-specific underground
refrigeration. In addition, about 760 kilograms of air per
second gets cooled to 6 degrees centigrade in 35 MW worth of
bulk air coolers on the surface and force ventilated through
subsurface air drifts into the main shaft. "

It also says: "
When production reaches full potential, management
expects costs to decline to R60,000 per kilogram (about
$10,000 in today's dollars)."

By my calculations, that comes out to $311.04 per troy ounce in 2005 dollars. Just to get it out of the ground. And the power company is reported in a later 2008 cable (http://cables.mrkva.eu/cable.php?id=146311) to be having production problems, and that as a consequence, the mines were running on 90% of required full-production power.

It is difficult to see this situation improving going forward.
MoneyWise's picture

It's all about demand after all.. Don't matter what is

production costs.. Faster and higher it's going to go, harder

it's going to drop, like a f* stone.. Watch and learn..

IronShield's picture

So what?  And the funny thing is, you still won't be able to afford to buy.  Actually, that's not funny, that's quite sad...  Bwahahahaha...  Just funnin ya...  Ya know ya be my bitch, forever...

MoneyWise's picture

I already have what I need.. About 95% Silver and 5% Gold

in total PM holdings since 2006..

I'm no buyer here, no way.. I can afford it,

but I'm not an idiot, sorry.. Since those f*ckers can print money

and buy Gold at any price, I cannot compete with those guys..

IronShield's picture

Now see; why didn't you say that before?  Though I would be concerned about that heavy weighting in silver it seems like you are on-track.  Sure, corrections are a possiblity; but as you say, we can't game those guys.  The only thing we can state with certainty is "Bull Market".  Until proven otherwise and act accordingly.

Use of Weapons's picture

There's a new investment in N. Spain, and the Solomon islands to look out for as well.

In 2006, riots aimed at running Chinese businesses out of the capital Honiara caused renwed concerns about security among foreign investors. Only after tensions eased for a second time did Allied agree to purchase the mine, spending $150 million to bring it back into service...With gold fetching record prices, and with an "intervention mission" of Australian, New Zealand and South Pacific military forces assuring security, the mine has been given a second life.

http://www.mineweb.com/mineweb/view/mineweb/en/page72068?oid=126028&sn=D... 

 

Comment: gold mines tend to ruin the local ecology, cause massive social disruption / pollution, and end up having to be policed by military. These costs are not costed into extraction prices. You might be able to take it out of the ground for $5, but paying that guy with an AK47 to make sure you can work without disruption isn't as cheap.

IronShield's picture

Uh, yeah...  Get ye ze phyzical while ye can...  Oh wait, the price is going down; get ye mo phyzical while ye can...

geekgrrl's picture

Oh, this Wikileaks dump is just a treasure trove of interesting facts. And names. Lots of names.

You folks interested in miners should do a little research. Some great first-hand info produced by human int paid for with our own tax dollars.

Another interesting cable (http://cables.mrkva.eu/cable.php?id=44464) mentions that Taiwan now has a level 4 pathogens ward, saying:

"On November 3, NHDetect CEO and President David Trudil discussed with AIT COMM and ECON officers a formal advocacy request that his company is submitting through the USDOC Advocacy Center regarding its bid on the first phase of a planned level 4 pathogens ward. Trudil explained that level 4 pathogens are "genetically-engineered bugs that can destroy the world;" far more dangerous than anthrax, SARS, or avian influenza. He said Taiwan already had an operational level 4 laboratory, and that he had recently arranged a tour of these facilities for U.S. DOD and CDC personnel in exchange for DOD allowing Taiwan MND and CDC to tour the U.S. level 4 ward located at Fort Detrick, Maryland. (AIT ECON and COMM were unaware of these visits. Reftel report on the DOD tour noted that the Taiwan facility claims to have a sample of a smallpox strain that produces a 100% fatality rate.) Trudil noted that there is currently only one other level 4 ward in the world, located in Siberia."

Just one more pistol on Chekhov's wall.

 

Use of Weapons's picture

Trudi is lying - there's more out there. http://www.cdc.gov/eid/content/14/11/1685.htm

In June 1999, the Canadian government opened its first BSL-4 research facility. Located in Winnipeg, Manitoba, the Canadian Science Center for Human and Animal Health is a state-of-the-art complex for studying dangerous infectious diseases. The Center is unique among BSL-4 labs in being able to handle both human and animal diseases, infected livestock, and zoonotic agents that can jump from animals to people.

France has built a new BSL-4 lab over the top of the former Institut Pasteur building in Lyons. This ultramodern construct of metal, glass, and plastic rests on concrete stilts and will complement Europe's oldest BSL-4 lab at the Bernhard Nocht Institute for Tropical Medicine in Hamburg, Germany.

Farther to the north, Sweden is building its first BSL-4 lab at the Institute for Infection Control in Solna. The United Kingdom has two such labs under construction. One is at the National Institute for Medical Research in London, and the other is a Ministry of Defence facility at Porton Down called the Chemical and Biological Defence Establishment. When those new facilities are completed, U.K. researchers will have five hot labs capable of handling nature's most dangerous microbes.

http://www.engineering.com/Library/ArticlesPage/tabid/85/articleType/Art...

 

[Note - yes, there's a difference between a BSL 4 lab and ward. Practically speaking, the UK has a ward, for sure, amongst the five labs - Porton Down is known for anthrax, btw]

 


But Taiwan really shouldn't have small pox. That's really, really, really fucking stupid.

geekgrrl's picture

Oh, I figured there were more level 4 labs capable of creating these WMDs, but one thing I find curious is the claim of 100% fatality.

The main difference between a lab and a ward are patients. Who do you think signed-up for that experiment voluntarily?

geekgrrl's picture
9/22/2008: SOME SHANGHAI BANKS NERVOUS ABOUT US TRANSACTIONS

http://cables.mrkva.eu/cable.php?id=170825

"High-level executives of Citigroup, JPMorgan, and Wachovia privately related to Econoff on September 22 that some Chinese banks are less willing to complete transactions with foreign banks -- especially U.S. banks, according to one contact -- and others are refusing deals."

fatalerr5's picture

What happens when China decides to sell off it's gold just to manage to screw over american investors?

groundedkiwi's picture

So Assange has done a deal. This leak is absolutely golden. 

Colonial Intent's picture

Ignatius Trebitsch Lincoln