Is China Ramping up Gold Purchases?
The Bear Traps Report opens its Turning Point post up by noting the premium in price for Shanghai Gold is $38.00, the highest in years while simultaneously noting the price in India is trading at a steep discount.
Precious metals are disconnecting from Breakevens. Is this a sign that China is buying more gold? Yes.
Aside from the now obvious news coming out of Asia that China bought Gold from the market as well as from Russia in recent months, as covered in this space— The report notes smartly that China’s December foreign reserves data showed that reserves had remained almost unchanged but that the amount of gold had increased for the second month in a row. Therefore, they are selling more fiat and buying Gold. “The PBOC had bought 1mm troy ounces of gold in December and November, after keeping its gold reserves unchanged for three years.” they note.
One thing we can add: While the real rate correlation has deteriorated of late, the linkage to the CNH has picked up.
It stands to reason that given all the events happening centered around China and Gold,there will be a new more populist approach to supporting the Yuan coming soon. The signs are all there including but not limited to the tighter correlation to the CNH recently
China “Owns Gold Through its People" is a direct quote from a Chinese banking official. What does that even mean? It means that China has directed its citizens to be buyers of Gold. China is using its companies, exchanges, banks and people as piggy banks for when it needs its Gold.
We would add that all of this is correct and music to our ears. Even more so considering other recent events going down in the world of Gold, money, and Oil. But it important to acknowledge this most recent behavior in context of Chinese holidays upcoming.
Short Term Caveat
The only thing that gives us pause, is the Chinese New Year is approaching, and that tends to distort Gold market behavior as China bunches up flows going into the season, and then again coming out of the season.
What you can bank on from this and related reports here is: Secular changes are here, will not be undone overnight, and there are many looking for a cheap entry into the metal now as it resurfaces on the world stage. Be sanguine about purchases of physical in washouts, you will not be the only buyer. And the other buyers are not speculators.
On the Inflation Front
Notable is that while many like to use five year real rates as an anchor of inflation expectations rarely if ever do these reflect real time inflation fears. They note it is based on Central Bank projections (subjective to begin with) and then adjusted by a weighting based on trading liquidity. This is like taking a statistic and adding your feel for it. Valid as it may be, the projections are not objective and the trading liquidity fudge factor is not helpful in assessing long term inflation factors.
Further noted by Larry and Co, over the last 25 years - when the Fed stops hiking, gold returns have been robust. Many would argue, this is gold moving higher, fueled by rate cuts or expectations of future rate cuts today.
Miners Are Cheap But Getting Bought Now
They then compare various Gold miners and indices to their financial stock counterparts sharing 3 specific observations on the segment
- Over the last three years, XME Metals outperforming the S&P by 8100bps or 81%. Two years it´s +61% for metals
- The last two years, NEM is outperforming MSFT by 1400bps.
- Miners of dividend producers like Barrick could rip post the rate hikes
The most interesting point is that Zoltan sees the next catastrophe will force the Fed into Yield Curve Control which in turn will force gold much higher. We have been saying this for nearly two years, and we agree.
The real overall point is that after catastrophes or secular changes like the ones being seen now the price of money changes and this leads to gold bull markets.
From Zoltan's Gold-mageddon Deconstructed here is likely what would happen if such a catastrophe unfurled:
Banks believed Gold would not be used as a final settlement medium in business ever again. Thus, it would not ever be needed for physical delivery enmasse. Gold had become the proverbial sardines: traded but never eaten If a crisis like the one Pozsar describes were to occur a death knell would sound for any bank with rehypothecated Gold shorts. Multiple claims on Bullion would come in as available collateral shrank. The price of Gold would skyrocket due to physical demand earmarked to close oil deals with Brics producers.
The high conviction of the Bear Traps report lies for us in this statement referring to the immense growth of the money supply:
In 1975, M2 touched $1.0T for the first time, then $15.4T on the eve of the Covid Crisis. She finished 2022 at $21.6T. You do NOT normalize out of this behavior quickly, we´re sorry. Hard asset fuel here.
He’s right. You don't fix this overnight. And if you try to, you are liable to cause the very crisis you wish to avoid.
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