Is This Why Gold Just Had Its Best Month In 2 Years?

Spot Gold prices rallied for three straight months to end 2018, with December seeing the biggest monthly gold gains in around two years (since Jan 2017)...

At the same time, China's official gold reserves rose for the first time in around two years (since Oct 2016)...


China's gold reserves had been steady at 59.240 million fine troy ounces from October 2016 to November 2018, according to data from the People’s Bank of China, and suddenly jumped to 59.560 million fine troy ounces at end-December.

The PBOC's overall FX reserves rose by US$11bn in December to $3.07tn. However, The increase likely reflects the currency valuation effect, which Goldman estimates to be +$14bn in December.

It’s not just China buying. As Bloomberg reports, Poland and Hungary surprised the market in 2018 by adding to their gold holdings for the first time in many years.

“It’s a bullish sign for gold,” Matthew Turner, a commodities strategist at Macquarie Group Ltd. in London, said by phone.

“The reasons could be diversification, a wish to get away from the dollar, but it’s hard to be certain because we just don’t know enough about what their motivations are.”

As is very clear from the chart above, China has previously spent long periods without revealing increases in gold holdings. When the central bank announced a 57 percent jump in reserves to 53.3 million ounces in July 2015, it was the first update in six years.

“I’m always wary of year-end moves, but if they buy again, then it’ll look like they’re on another run of additions, like they did in 2015-2016.” Turner said.

Crucially, the size of the gold addition are far less important than the signaling effect - why did China decide now was the right time to publicly admit its gold reserves are rising?

After months of seeming stability in the yuan relative to gold, Q4 2018 saw China seemingly allow gold to appreciate relative to the yuan

One wonders if Alasdair Macleod is on to something when he notes that if the yuan is to replace the dollar for China's trade, officials will have to back it with gold...

It is hard to see how the US can match a sound-money plan from China. Furthermore, the US Government’s finances are already in very poor shape and a return to sound money would require a reduction in government spending that all observers can agree is politically impossible. This is not a problem the Chinese government faces, and the purpose of a gold-linked jumbo bond is not so much to raise funds; rather it is to seal a price relationship between the yuan and gold.

Whether China implements the plan suggested herein or not, one thing is for sure: the next credit crisis will happen, and it will have a major impact on all nations operating with fiat money systems. The interest rate question, because of the mountains of debt owed by governments and consumers, will have to be addressed, with nearly all Western economies irretrievably ensnared in a debt trap. The hurdles faced in moving to a sound monetary policy appear to be simply too daunting to be addressed.

Ultimately, a return to sound money is a solution that will do less damage than fiat currencies losing their purchasing power at an accelerating pace. Think Venezuela, and how sound money would solve her problems. But that path is blocked by a sink-hole that threatens to swallow up whole governments. Trying to buy time by throwing yet more money at an economy suffering a credit crisis will only destroy the currency. The tactic worked during the Lehman crisis, but it was a close-run thing. It is unlikely to work again.

Because China’s economy has had its debt expansion of the last ten years mostly aimed at production, if she fails to act soon she faces an old-fashioned slump with industries going bust and unemployment rocketing. China offers very limited welfare, and without Maoist-style suppression, faces the prospect of not only the state’s plans going awry, but discontent and rebellion developing among the masses.

For China, a gold-exchange yuan standard is now the only way out. She will also need to firmly deny what Western universities have been teaching her brightest students. But if she acts early and decisively, China will be the one left standing when the dust settles, and the rest of us in our fiat-financed welfare states will left chewing the dirt of our unsound currencies.

 

Is China's "signal" an explicit warning of the end to the dollar era that has existed since August 1971, when gold as the ultimate money was driven out of the monetary system.