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

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
snowball777's picture

So you like trannies with fake tits?

Newsboy's picture

Estrogen can make anybody grow the real thing, even you...

SuperRay's picture

don't worry, tao.  since it's made from petroleum, it soon will be too expensive to use anyway...

knukles's picture

Can we stick her in the car to burn as an Ethanol substitute if she gets too bitchy?

Awakened Sheeple's picture

Gives new meaning to the term Peak Oil

Troll Magnet's picture

At least we have women.  In China it's something like 6 males for every 4 females.  

knukles's picture

Impossible to take an accurate count in Thailand.

Sgt.Sausage's picture

... where the males *are* females.

Hulk's picture

Crocodile Dundee check comes in handy over there...

Yen Cross's picture

That was good for a Giggle Hulk! Thanks. after all this is A HOLIDAY , BEFORE  the European Union Mind F.cks itself next week.

euphoria's picture

You should always reduce your fractions or ratios to the lowest common denominator. 

"In China it's something like 3 males for every 2 females."

 I fixed it for you. go back to primary school troll. 

lasvegaspersona's picture

so a threesome is you and....?

Troll Magnet's picture

been out of school for over 20 years now. a little ivy education and i still suck at math. but i can count: one ounce, two, three, four...and that's all that matters.

Ganja Jane's picture

Now, now....fight 'nice.' He probably was educated in the US: Of 30 comparable countries, the United States ranks near the bottom. Take math - Finland is first, followed by South Korea, and the United States is number 25. Same story in science: Finland, number one again. The United States? Number 21.

Could this be why when it comes to the basic economic principles, most Americans have no clue? because they can't 'do the math?'

Grimbert's picture

Cool a search engine for the cables

 

SDR as reserve currency?:

http://cables.mrkva.eu/cable.php?id=213082

 

JW n FL's picture

 

WikiLeaks Search Engine http://cables.mrkva.eu/ for the Cables!

Nice Grab Grimbert ! KUdos!!

DoChenRollingBearing's picture

+ another Grimbert, great find.

Volaille de Bresse's picture

For quite some time now I've been thinking the U.S. kleptocracy is in fact a bunch of fat-minded small-time crooks (Kissinger Brez etc) gambling their way into world domination.

 

On the other hand the Chinese kleptocracy is highly intelligent, subtle, anf they have plans for the FIFTY years to come. Gold is obviously one of them...

Troll Magnet's picture

This is not to be taken lightly.  I was in Shanghai a year ago on a business trip and had some spirited "debates" with Chinese over drinks.  All they kept saying was, "We're learning your language.  We're reading your books.  So keep building your military empire abroad.  We're just going to continue investing and eventually catch up with you."  Fuckers.

DosZap's picture

Troll Magnet,

Boy are we in great shape if this in fact true.

< We're reading your books>

They will really be screwed up.

Manzilla's picture

When I was in boarding school back in the 90s my chinese friends would tell us that their government was paying for them to go to school in the US to "learn" about us. They used to laugh and say "we will own you one day". They weren't joking.

pods's picture

So by them being the primary supplier of rubber dogshit and holding a couple trillion in worthless IOUs they own us?  Who is the bigger fool?  

China cannot design anything that they have not stolen the IP on.  

Their navy would probably fucking break down halfway here with their reliability.

pods

Troll Magnet's picture

or their naval ships will find a way to collide with their tanks. Made in China, bitchez!

stephysat28's picture

Ican't afford anymore PM'S but i can afford Chef Boyardee thats going to be money too!

 

sun tzu's picture

I bought a few hundred dollars of canned and dried food and a couple hundred pounds of rice grains. I figure the utilities will keep running as it did in Germany and Argentina when their currencies collapsed. My next move is solar panels and an electric car since energy prices will be the next to skyrocket. You just need enough to make it comfortably through a few months of turbulence until things settle down.

If nothing dramatic happens, I'll have lower energy expenses and plenty of food for camping trips for a few years. It's a win-win situation. My take is we're either headed for a depression (austerity)  or hyperinflation (no austerity). It's just a matter of time. 

Sgt.Sausage's picture

==> enough to make it comfortably through a few months

It will take *years* to rebuild.

Ganja Jane's picture

I've been doing this too and after my bills are paid, I buy fractional silver with what little is left. I case I need to barter for something I didn't think to have....or pay my rent....

Esso's picture

That's the thing, when the crash comes, PMs will become so valuable, that they will be de facto worthless during the crisis. You want this can of Bush's Best Baked Beans? One ounce of gold should be enough. PMs will be a way to transfer wealth through the crisis, but will be lost quickly by people who think they can buy their way out of the crisis rather than preparing.

Sgt.Sausage's picture

This can't be upvoted enough.

The new "rich" will be those who can *produce* food in quantity.

pods's picture

Silver is for exchange.  Junk silver is easily recognized.  Even slug coinage will retain some value in a collapse.

pods

Ying-Yang's picture

Chairman Ben Bernanke faced-off with Fed-hating Representative Ron Paul during his monetary policy report to Congress on Wednesday.  The head of the Fed was forced to respond to accusations of enriching already rich corporations while failing to help Main Street, while he was pushed on his views on gold.  When asked whether gold is money, Bernanke flatly responded “No.”

sun tzu's picture

That was a bad question to ask. It depends on the definition of money.

One definition of money is "something generally accepted as a medium of exchange" 

At the current time, gold is not generally accepted as a medium of exchange. You generally have to exchange your gold for fiat currency in order to buy products or services around the world. Right now, gold and silver are assets

cowdiddly's picture

Yes and some idiot on CNBC told Peter Shiff he did not want to buy gold to keep in his sock drawer. If that Idiot would have put 250K of gold in his sock drawer 11 years ago he would now have 1.88 million dollars worth of socks. Its OK you CNBC bubble heads just keep buying your stocks for 20 years of no gain and 3 crashes. 3 bilion Indians and Chinese are just plain wrong. LOL

knukles's picture

Were those the guys arguing about Growth versus Value Socks?

caerus's picture

they're not idiots...they're shills...ok, they're both

Kuri's picture

Hey, guys : after friday's surge, anyone betting on the next margin hike ? If not, gold at 2.000 $ by the end of this month ? Dunno what to do... Shit... moves too fast for me...

lasvegaspersona's picture

It does not matter...much...eventually the paper market will collapse and the physical (only) will go to a gabillion. Just get some...

Bicycle Repairman's picture

Margin hikes = buying opportunities.

Captain Obviousness's picture

Epic.

Unfortunately that's such an inside joke I have no one who would get it to send it to :(

lasvegaspersona's picture

...Denninger is a deflationist and wrong and his followers will suffer....sorry he is not evil...just horribly wrong...

buzzsaw99's picture

Everybody wants to take a bite out of the pension funds, even the goldbugs.

JW n FL's picture

If Pensions.. were to buy Gold it would be less risky than MOST of the shit they have pilled into looking for Yeild!

JW n FL's picture

 

People tend to forget things or maybe they were NOT paying attention before 2007.

IsraCast: WARREN BUFFETT GOES ISRAEL

www.isracast.com/transcripts/070506a_trans.htm - CachedSimilar You +1'd this publicly. Undo

May 7, 2006 – WARREN BUFFETT GOES ISRAEL. American Investor Buys Israeli Company Iscar For $4 Billion. Warren Buffett: 'The Israeli Management ...

?


  • Warren Buffett - Israel


    www.mfa.gov.il/.../Israel.../Buffett+acquisition+of+Iscar+puts+Israel... - CachedSimilar You +1'd this publicly. Undo

    May 7, 2006 – In the largest ever buy-out of an Israeli company, American investor Warren Buffett has paid $4 billion for an 80 percent stake in Iscar ...


  • Warren Buffett's Jewish Connection | Nation | Jewish Journal


    www.jewishjournal.com/home/preview.php?id=15953 - CachedSimilar You +1'd this publicly. Undo 30 posts

    2006/06/01 - Warren Buffett is not a Jew; in fact, he describes himself as an agnostic. ... 80 percent share in the Israeli metalworks conglomerate, Iscar, for $4 billion, ... Club, a golf club, didn't have any [non-Jewish] members," Lipsey recalled. ...
     Get more discussion results


  • Warren Buffett - News - The Jerusalem Post


    www.jpost.com/topic/Warren_Buffett - Cached  You +1'd this publicly. Undo

    Follow Warren Buffett at jpost.com for real time news, photos and videos. ... JERUSALEM OF GOLD IS Israel's first one-ounce, 24-carat gold bullion coin ...

  • tamboo's picture
    2. Buffett, Warren, United States, 36.0, Berkshire Hathaway[MARANO - HIDDEN JEW - PSEUDO-JEW]

     

    Jew Watch - Leaders - List of Jewish Millionaires