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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DosZap's picture

buzzsaw,

Honestly, IF the Pension Funds DID invest 10% in the metals, then the pension problems would go away in short order.

They would not have the issues thay have now of being SHORT.

NOW that they are short, INVEST in PM's, great way to make up  a lot of lost time, and money, in a short amount of time.......12-60 mos.(if that long).

buzzsaw99's picture

pension funds are "dumb money". if they start buying gold that would mark the top. or maybe you feel it is different this time and that gold will only go up until the dollar is no more and anyone caught without gold will be forever poor?

DosZap's picture

buzzsaw,

My point was, had they invested, did invest a portion of their assets into PM's, then they would not crawling to Unca Suga, and US bailing them out.

And yes,things are a damn SIGHT different this time,when in mans history has every civilized nation been in such a frigging mess?.

NEVER.

Gold is going to go up from now on, I do not see a downside to it ever again...........................not with a GLOBAL market, and a limited amount to be had.

Simple supply and demand dictates that.........common sense.

Regardless if there is anything called a DOLLAR.

Or America for that matter.

buzzsaw99's picture

If that's the case why even bother tracking the nominal price as the author seems to do? What does it matter? In fact, by your argument, one could never pay too much for gold. pensioners have bills to pay, and as such they can't afford to hand goldbugs a tidy profit (which the goldbugs of course would never take because gold is valuable and the usd is worthless right)?

lasvegaspersona's picture

gold is going up.... catching up to where it should be (if not for the paper gold influence) and not coming down...got it?

It should be much higher NOW...it is going to be THE wealth asset it has always been...as such it will be highly valued....not going to 'top' out...

buzzsaw99's picture

I remember the last gold bubble. That's what they were saying back then too.

DosZap's picture

buzzsaw @19:31,

I really get a semi kick out of these TOOLS that keep comparing THEN(that Bubble) to NOW.

There are ZERO parallels, and this time it is ENTIRELY different.We are in a true paradigm shift.

You (not personally) anyone should not use any of the old figures, and ratios, to make predictions.

We are in 100% virgin uncharted territory.Anyone using the OLD period, and last Bubble, should be rejected out of hand before a dialouge even begins,it tells me they are idiots,ignorant,trying to sell me something, or a combo of all three.

Bubbles(true Bubbles) ALL have one thing in common.

You KNOW when your in one, when EVERYONE is in, or talking about getting in..........then, you get out.

Not until.

tmosley's picture

This time is NOT different.  The equation is the same.  The inputs to said equation, however, ARE different.  "Last time" we had a creditor nation, nations around the world clung tightly to the dollar BECAUSE we were a creditor nation (none but France were even LOOKING at alternatives), China was closed off from the markets, and we had monetary policy that was at least TRYING to stop inflation, rather than trying to create it (ie interest rates were above 10%).  

The price mover came from a tiny group of investors trying to force a return to a metal standard.  

Pretty much every input is diametrically opposed to the inputs from "last time"--we are a debtor nation, other nations are actively looking for alternatives to the dollar for that reason (except France and the rest of Western Europe, lol).  China is in the markets in a large way, buying up gold, monetary policy is designed to create inflation (interest rates are near zero).

The price mover is practically everyone from retail level up to central banks (outside of the West) BUYING. Invert the inputs, invert the outputs.  It's that simple. 

DoChenRollingBearing's picture

Green

OK, I'll buy that as a good summary of the similarities and differences between the 1980 Bubble and what we see now.

The ROW is buying the physical, we should too!

Sudden Debt's picture

So let's get this straight:

1. China is fighting the dollar and euro by buying gold.
2. American citizens are buying gold and thus fighting the dollar and euro

3. Everybody else in the world is buying gold and fighting the dollar and euro

So who will Bernanke pick on first to try to make a last stand?

What will they do when it's a broken arrow situation?

 

JW n FL's picture

China (since this cable was communicated) has developed a Euro-Panda Bond! LOL!!

All I am saying is this arguement is a lil dated and is being had by the help, by boos is better than your boss.. boot lick, boot lick, boot lick.. kind of conversation.

DosZap's picture

SD @ 17:54,

WRONG...................

2. American citizens are buying gold and thus fighting the dollar and euro.

95%+ of Americans are not EVEN buying a GRAM of silver, or gold.

They are in the mkts, or are holding cash in FDIC Banks, in IRA's, and CD's, and 401k's, or annuities.

DoChenRollingBearing's picture

The numbers I see most often are only 1% to 3% of Americans own any non-jewelry gold.

I am seeing more general interest though...  Two non-owners have asked me about gold lately...

Yen Cross's picture

 Hows that Russian " Buy BACK" program working? 7% or there's about<

Oquities's picture

last 10 years - 6.5ish% return in my ira, but 5x by simply buying pretty gold coins.

bob_dabolina's picture

"Now, what would happen if mutual and pension funds finally comprehend they are massively underinvested"

What would happen if China finds itself overinvested? Ahhhh, it's like the mortgage thing.

"Better get in now at all time highs. You might miss the oppourtunity."

"Prices will never go down" 

What does this sound like?

DosZap's picture

bob-d,@ 18:02

U so Funnnnnnnnnnnneeeeeeeeeeee............< Better get in now at all time highs. You might miss the oppourtunity>.

For when,this month?,Or last, or the last 12yrs or the next 10?.

bob_dabolina's picture

I dunno. I just think gold can only go up.

What say you?

mrgneiss's picture

Soooooo much credibility..........bearish all the way up from $1250 thereabouts.  Focus on the dollar not gold, gold is just a symptom.  Focusing on gold is like being worried about a cancer patients sore throat.

bob_dabolina's picture

People like you make me weary of gold. 

If idiots like you are vested....the top can't be far.

IQ 145's picture

It's not a valid argument; even an idiot can be right. A stopped clock is right twice a day.

bob_dabolina's picture

I ended this like 20 minutes ago. Get over it, you're lost.

tmosley's picture

I love how two idiots can say the exact same thing to each other over and over, and then one of the idiots claims he has "won" while hte other has "lost".

The fact that you think you have won in this manner makes you dumber than the other bag of hammers over there.  Sorry, you lose.  Not by much though.  It's the way a potato loses to an eggplant.

SuperRay's picture

it sounds like you're not seeing the big picture..