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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Smiddywesson's picture

A commodities backed currency would handcuff the bankers from manipulating the new currency.  A gold related currency would leave them free to continue gaming the system, the true purpose of central banking.

 

Ex.  If the currency were backed, among other things, by copper, central bankers could push up copper prices to justify more printing.  However, in doing so, they would ruin the economy.  Too many industries rely upon copper.  The same holds for almost any other commodity.  Only gold can go up or down without creating major disruptions, so my guess is gold.  Well, that and the fact that central banks are buying.  :-)

Snidley Whipsnae's picture

SW... " A gold related currency would leave them free to continue gaming the system, the true purpose of central banking."

Correct,,, and since when the new currency is introduced there will probably still be no inventory of US Gold, how would anyone know if the 'new currency' is backed by 40% gold or 10% gold?

...and 40 more years of kicking the can till Mr Market uncovers the lie of 'new gold backed US Currency'... Mr Market always wins but sometimes it seems to take eons.

the banksters are shrewd... never underestimate them...

Kayman's picture

the banksters are shrewd... never underestimate them...

The banksters are criminals... never underestimate their underhandedness...

zerozulu's picture

It is hard to foresee consequences. I think prohibition caused reliable and fast car industry.

TeMpTeK's picture

"SEE

Executive Order 6102"

Blah Blah... To whom do presidential executive orders apply to anyway? Hmm.... Military personnel maybe? Or...can Congress stop California from allowing Medicinal marijuana within its borders? Or better yet.. can they ban guns in school zones in anyone of the 50 states?(See U.S. v Lopez) Apparently not!!!.... Territorial Jurisdiction is a Bitch! and gold confiscation is a coin dealers wet dream...

youtube.com/watch?v=HuMmQX2TWoQ

nuinut's picture

nope-1004 said:

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

Then you will have observed that the "gold market" which is referred to in the article is composed almost entirely of paper claims on gold, rather than physical gold... putting the actual value of physical orders of magnitude higher than their estimates.

FOFOA said:

As the physical reserves within the BB [bullion banking] system are all moved into allocated accounts, at some point the remaining claims will simply have to be cash-settled. At that point all paper gold markets will cease to exist and all that will be left is the stable supply of above-ground physical gold in the absence of external inflatable (or deflatable) influences.

And when this happens, the dollar will fall in value very quickly, and with it, all savings tied to debts denominated in dollars. What this will reveal on any balance sheet that contains both dollar-based assets and gold, is that gold will rise to fill the void left by the dollar. The balance sheet will not collapse. But the wealth will have transferred from dollar assets into gold.

This is the main significance of all the Central Banks stocking up on gold today as well as the Eurosystem's quarterly mark to market policy. 

China are doing more than just amassing physical gold reserves, they are currently implementing an allocated (ie. physical) spot gold exchange (Pan Asian Gold Exchange (PAGE)) as well.

This spot gold price is based on allocated contracts. Watch the spread between PAGE and COMEX when the PAGE spot price goes live. Physical will move toward PAGE if it is priced higher there, while COMEX will fall as traders begin to make the distinction between contracts which can be cash-settled and contracts which are physical-settled, and sieze the arbitrage.

DoChenRollingBearing's picture

+ $1880 now

+ $55,000 later

THAT was a great point, if we see a price differential between PAGE vs COMEX (assuming PAGE is honest, an assumption...), then that brings us closer to freegold.

Viva FOFOA!

sgorem's picture

thanks, couldn't have explained IT better myself:)

Oh regional Indian's picture

Nuinut,

One of the bedrocks of FOFA's thesis is the resurgence of the Euro and the Euro's massive Gold Reserves AND the fact that they mark them to market.

Now 2 of those three legs look really shaky.

So yes, the Euro might drive Gold to it's Freegold value.

More and more though, somethinig tells me that if Gold becomes "free", nothing else will be. Free that is. Including you and me.

Only a fascist/wartime/warlike EU will hold together at this point. And if Libya and UK/France's shameless aggression thereof are any indication, it's getting there fast.

V

http://aadivaahan.wordpress.com/2011/09/02/first-print-and-some-amazing-reading/

Temporalist's picture

When saying "Euro's massive gold reserves" why is that shaky?  The Euro Zone agreed to a paper standard why not now just switch it to gold?

Oh regional Indian's picture

Who controls that decision in the currently broken financial system of the EU? Who holds it? Is it ECB gold? Will Italy agree to clean up it's internal debt issue by lease/sale of it's massive reserves by EU diktat? Hardly.

10 years ago yes. Now? I say it would be very difficult to pull Europe together, if you know what I mean.

V

High Plains Drifter's picture

i believe europe will continue on like it is more or less due to the fact that the controllers want this. this is what they want and what was in their plan from the beginning and a deviation from this plan would not be in their best interest. nationalism is not what they want. racial awareness is not what they want. this is one reason why so many muzzies are being dumped on white europe. because they want to break down the racial harmony there to create weakness. and so it has happened and so it will be..........as for me and my house, i shall not bow the knee to these creeps. i shall never give in and i shall not go quietly into the night. i am hpd and i approve of this message......

Temporalist's picture

My point is each sovereign has their own gold holdings and in the event of a Euro defaiult they could still have a single currency agreement between the Euro participants if they agree to switch to a gold standard.  No "dictat" necessary just agreement.

 

I agree with you and HPD that now the sovereignty is in jeopardy but the Euro Parliament does not have complete control yet at all and the nations have not yet lied down and gone quietly...yet.

nuinut's picture

ORI,

Freegold (FOFOA's "thesis") is not driven by the Euro. It is a natural evolution of the monetary system, and the only way in which the Euro is relevant is that it's designers anticipated this evolution and structured the Euro so that it would function in this new environment.

This was done in two ways which differ from the dollar, but which other currencies have since begun to emulate (wonder why?):

1. Sever the link to gold. The Eurosystem balance sheet shows its gold reserves marked to market, as you say. Instead of fixing the exchange rate between gold and the Euro, this is left for the market to decide... gold is publicly valuing the euro, for all to see, on the balance sheet of the euro issuer. The asset is valuing the currency

2. Sever the link to the nation-state. As we see the Euro member nations cannot devalue their currency, as much as many of them would currently like to. The currency is free from political influence... and is free to be valued by the market. This valuation is publicly visible in the MTM value of the Eurosystem's physical gold reserves on their balance sheet.

The reason most observers are having difficulty understanding this arrangement and the way it functions is because they are misinterpreting what that balance sheet is saying; it is not the euro valuing the gold, it is gold valuing the euro.

So we see that as the situation develops, the Euro member nations are having their currency devalued, publicly and unhindered, by the market, via gold.

The euro was designed to function in the new paradigm, that is all. Freegold does not need the euro.

This post:Paper, Pyramids & Paradigms does not address the euro, but does describe the perspective with which one can easily understand what is unfolding currently before our eyes, and understand how the euro, unlike the dollar, is built to go with the flow rather than resist it.

Oh regional Indian said:

...somethinig tells me that if Gold becomes "free", nothing else will be. Free that is.

Look, if you don't understand gold or the euro, and you clearly don't, then you are not in a position to appreciate the implications, are you? Individual access to free-trading gold, unhindered by claims (paper gold), price-fixing and other shenanigans is exactly the thing that gives individual sovereignty.

 

Why else do you think it has been hindered?

Oh regional Indian's picture

You said "Look, if you don't understand gold or the euro, and you clearly don't"

I'll take slight umbrage to that, since understanding is always mixed with context and conditions.

That said, I understand where you are coming from. All I know is that politics/military will overshadow any nonsense (from the controller's POV) regarding sovereignity etc. Perhaps you need to widen the basis of your own convictions to see that FOFA's world considers a narrow plank, not taking into account war, europes history of fascism and the fact that the little guy has never been allowed to win. 

Individual access to free trading gold. Like the wild west? Eh? Sure, I want to live like that.

V

 

nuinut's picture

So why has gold been hindered, always fixed, pegged or supressed?

This underlies war and politics. I think it is you who needs to widen the basis of your understandings, ORI, starting with cause and effect.

The monetary system underlies everything, it is the foundation of any society. Without one we are just self-sufficient individuals. Wars, fascism, whatever, all are to secure advantage over the monetary system; control the gold and you control everything, but give everyone access and they hold their own sovereignty.

We are now at a point where they are increasingly demanding that access as the inequities of the artificial system overpower it. Simply too big for politics/military to overshadow any longer. 

I gave you a link to my context and understanding, in my own words. It's only a few minutes reading, in plain english. Large font, some simple diagrams.

 

Individual access to free trading gold. Like the wild west? Eh? Sure, I want to live like that.

Now you're just being silly. A gold standard is not free trading gold; quite the opposite, it is fixed.

You enjoy living as you do now?

DaBernank's picture

You think the € currency is free from political influence? Dream on. The ECB has gold reserves of only ~550 tons and now has €120.3 billion in PIIGS debt on it's balance sheet and they haven't even begun to really deal with Italy and Spain yet. Most of this debt monetisation has been for Greece, accounting for 2% of the Eurozone GDP and 4% of its population. Printing is the only way for them in the future. With it or without it, the EZ starts breaking up because the political dream of an integrated Europe and orgs like the ECB ignore the real people in the individual nations and their distinct identities.

Temporalist's picture

The "Eurozone" has more gold than everyone combined at over 10k (near 11k) tons between the participating nations.  They are already trying to take the gold of Greece, Portugal, etc. and gold will play an increasingly important role in the future of the Eurozone monetary system.

DaBernank's picture

Perhaps I'm not clear. Even with 10k tons, per capita it is around the same amount as the US, no big deal and doesn't match debts until 55,000 an ounce not to mention much of that Euro gold is physically in New York and London.

The "Eurozone" is a purely political concept anathema to the wishes of the majority of the people in the individual nations. It's alright during the speuclative bubble (1920s and 2000s) but during the bust, look out. When the country I live in is "ordered" to surrender its gold to Brussels, Vienna will laugh and ignore them, likewise Berlin, Paris, Amsterdam, Lisbon, etc. The gold will not leave individual states, it does not belong to Brussels, the ECB would have to send mercenaries to get it, the people of Europe want out of this failed projekt. Let's talk about this again when the gold from Athens is physically being transported to Brussels, I believe we will have a New Drachma first.

Oh regional Indian's picture

"Individual access to free-trading gold"

Your words from the post above. But I won't call you silly. Just drunk of FOFA's golden kool aid.

The rest of your tone is too pedantic. I'm sure it's okay to disagree and I just happen to believe that FOFA isn't all that.

And neither is gold.

And I do enjoy living as I do now. I'm out of the system. Thanks for asking.

V

nuinut's picture

ORI, are you never going to answer the question?

Why has gold been fixed, pegged or fractionalized for so long?

WHY?

If a proper unhindered market discovered price for physical gold would make everyone "less free" as "somethinig tells you", then wouldn't this be happening already as an integral part of your conspiracy theory?

Let's stick to the topic.

Can you not answer the question?

Léonard's picture

ORI

Only a fascist/wartime/warlike EU will hold together at this point. And if Libya and UK/France's shameless aggression thereof are any indication, it's getting there fast.

I'm sure you meant to say the USA shameless aggression on Lybia via their puppets Cameron and Sarkozy, two guys pretty much hated by English and French people.

Oh regional Indian's picture

Indeed leonard, even though the true lines of control seem a little jumbled. i think it is impossible to tell who the hidden hand is.

What we do know is that his (her) minions are doing an awesome job screwing up everythign in sight, eh?

V

Smiddywesson's picture

The balance sheet will not collapse. But the wealth will have transferred from dollar assets into gold.

Nuinut gets it.  The wealth will transfer between balance sheets too, from ALL assets, into gold.  If you don't hold gold, you will lose wealth to those who do and you won't even have to write a check to the IRS.  What is being planned is the biggest tax in history.  Minus any defaults on debt, the debt that is owed is going to be paid for by everybody with anything but gold.  Your pension fund is paying off the debt.  Your house is paying off the debt.  Everything you own will deflate as they inflate the measuring stick of wealth, gold.

Long-John-Silver's picture

At least our food isn't made out of plastic.

They make Plastic with food!

How is corn plastic made?
my puppy for prez's picture

It might as well be!  Almost everything is GMO (mutant!), pesticide-laden, irradiated, pasteurized, and basically sapped of nutrition!  

So we've got THAT going for us...

A Lunatic's picture

I regularly see milk in the grocery store with a due by date, five weeks out. That shit ain't milk.

foofoojin's picture

I have never scene that. however. the nesquik strawberry milk has a 180 "shelf stable" life.

James's picture

Chicken Mcnuggets have plastic in them.

MayIMommaDogFace2theBananaPatch's picture

That's the Happy Meal prize -- much smaller these days!

CompassionateFascist's picture

I don't care! They taste great. Mcnuggets. Yummmmmmmmm...it's what's for lunch. (Tomorrow). Today I had a 7-11 Big Bite hotdog c ketchup, relish, and jalapenos. It's still repeating on me....

Byte Me's picture

It's still repeating on me....

That's the polypropylene in the relish then..

Silver Shield's picture

The Case for a 1 to 1 Gold to Silver Ratio.
http://dont-tread-on.me/the-case-for-the-11-gold-to-silver-ratio/

If the Chinese love gold...

Buy silver.

JW n FL's picture

Buy Both!!

Be Patriotic.. if not to the Government then your fellow Americans!

Long-John-Silver's picture

My current Gold to Silver ratio is 25% Gold and 75% Silver. I try and maintain that ratio as I convert my fiat dollars into each. One day soon I will no longer be able to convert dollars to Gold and Silver. No one will make that trade.

FEDbuster's picture

Don't forget to trade some FRNs for food, too.  A two year supply for each member of your family should get you over the hump, after that you better have the ability to produce or barter for your needs.  In a post Walmart world, there will be no need for lawyers or pension fund managers.

High Plains Drifter's picture

that is a good ratio imho. the real juice is in silver. but most people don't realize that. but they will and soon enough. silver is the poor man's gold and junk silver will one day soon, no longer be called junk...........ah the smell of real money.........in the morning......

Troll Magnet's picture

Oh, man...If GS ratio ever becomes 1:1, I'm buying me a small island!  

Motley Fool's picture

Words for the stupidity of this article fail me. 

The historical ratio of bread to gold was also lower, bread was a lot more hassle to make.

Suffice to say, I don't want to get into it, but do yourself a favour and buy some gold too, so you don't lose all your savings.

Transitory Disinflation's picture

ZEROHEDGE will SOON IMPLODE! 10,9,8........

 

Everyone hide the Internet is coming.

JW n FL's picture

 

 

$16 Trillion Dollars???

http://info.publicintelligence.net/GAO-FedAudit.pdf

 

PLUS!!!

 

Wall Street Aristocracy Got $1.2 Trillion in Fed’s Secret Loans

http://www.bloomberg.com/news/2011-08-21/wall-street-aristocracy-got-1-2-trillion-in-fed-s-secret-loans.html

 

PLUS!!!

 

SEC Covering Up Wall Street Crimes?

http://www.rollingstone.com/politics/news/is-the-sec-covering-up-wall-street-crimes-20110817

 

Plus!!!

 

How about the $2.5 Trillion in Social Security Bailouts??

http://moneywatch.bnet.com/retirement-planning/video/good-news-on-social-security/478373/

 

a real smart girl said these words the other day and they have stuck with me.. (Daddy Bush)

who's your farmer? _________________________

who's your banker? _________________________

where's your money? _______________________

http://www.youtube.com/watch?v=4Sti1xMOYj0

she warned of the housing problems.. she was the head of Department of Housing under Bush.

Fitts served as managing director and member of the board of directors of the Wall Street investment bank Dillon, Read & Co. Inc., as Assistant Secretary of Housing and Federal Housing[1] Commissioner at the United States Department of Housing and Urban Development in the first Bush Administration, and was the president of Hamilton Securities Group, Inc., an investment bank and financial software developer.

http://en.wikipedia.org/wiki/Catherine_Austin_Fitts

 

lasvegaspersona's picture

What part of the 250 page GAO paper we're you directing us to?

CSA's picture

Can someone tell me why this guy spams with articles and links that no one goes to?  Same freaking cut and paste.  If you're going to sound an alarm, don't act like a spambot.  

 

Can someone else please explain how he got 2 thumbs up?

James's picture

vote for yourself and call a friend?

CompassionateFascist's picture

Well, C.A. Fitts is a good one. Right in synch with Fight Club on most issues. In fact, during her gub'mint years, she tried to investigate ZOG theft of trillions. Got a visit from Men in Black: "desist, or you will cease to exist". Nice.

papaswamp's picture

ZH covered weeks ago dude...way behind.