China really loves gold – and it understands gold better than any Western nation.
It’s no secret that the People’s Bank of China has been buying the yellow metal for years, shoring up its reserves. And the country’s central bank may have been buying for decades before it became at least a little more transparent.
Recently, however, the Chinese central bank has been among the world’s most aggressive buyers of gold.
In fact, there are some clues that point to the fact that their actual gold holdings are a multiple of what’s actually being reported in the financial press, which in turn points to a shocking long-term strategy: a move to link or back the yuan with gold.
The implications of this would send shockwaves through the world economy, so it makes sense to start getting ready to profit right now…
China and Russia Are Leading the Charge to Buy Gold
For nearly 20 straight years until 2009 and 2010, central banks were net sellersof gold. Between 2003 and 2008, central bankers sold 2,846 metric tons of gold.
And then, as the world was exiting the worst of the financial crisis, something strange happened: The trend reversed in a sea change for the gold markets. Between 2009 and 2014, the banks bought 2,301 metric tons, making for a 5,147 metric ton swing to the upside.
According to the World Gold Council, they bought 477 metric tons in 2014 alone, the second-highest level in 50 years and a 17% jump over 2013.
Now, both China and Russia have accumulated large proportions of their central bank reserves in U.S. Treasuries, and they’re growing increasingly anxious to diversify away from that “asset.” Gold makes for a great alternative, especially after such a sizeable decline in price over the past four years.
Russia alone gobbled up a whopping 173 tons last year, adding 10 to 25 tons monthly in the past five years.
And, after six years with no updates, China finally broke its silence to announce a 60% increase in reserves to 1,658 metric tons. In the third quarter of 2014, they added another 50 metric tons.
Those are the official numbers, and they’re robust enough. But what’s happening off the books is truly incredible…
How Much China Is Really Buying “On the Sly”
David Marsh, a columnist at MarketWatch, thinks “China probably has a lot more gold than it admits.”
I concur. What’s more, as the gold China buys from domestic miners is paid for in yuan, these purchases are easier to leave out of official reserve numbers, thereby accumulating quietly.
By some estimates, China’s actual gold hoard tops an astounding 10,000 metric tons.
One expert, Simon Hunt of Simon Hunt Strategic Services, has suggested a figure as high as 30,000 metric tons:
“China has much more gold than it is allowing the world to see. As Alasdair Macleod, probably the world’s number one analyst of the gold market, wrote that between 1983 and 2002 China probably accumulated 25,000 tons of gold. Thus, its current gold holdings are probably north of 30,000 tons in contrast to the USA which has either sold or leased most of its gold.”
Clearly, that’s a huge number, and if ever China were to confirm something even close to that level, it would certainly shock gold to a massively higher price.
Whether or not China has already accumulated such huge reserves, all the signs point towards a nation that’s aggressively growing its gold stash.
And to do so covertly makes perfect sense: Their buying puts less upward pressure on the price, allowing the Chinese to accumulate even more on the cheap.
Remember, China is only slightly behind India as the world’s largest gold consumer, but it’s indisputably the world’s largest gold producer.
Its mining output is double what it was just a decade ago, and that production stays in-country to help satisfy domestic demand.
Like India, China has a deep, ancient cultural affinity for gold, and it knows only too well that “other” Golden Rule: Who has the gold makes the rules.
With that in mind, the idea that China actually holds a lot more gold than it’s reporting makes much more sense.
At the same time, China is increasingly asserting its position on the world stage – its move to make the yuan a global reserve currency is only the latest step.
So for China to be laying in this kind of massive supply can only mean somethingbig is in the works…
Why China Needs So Much Yellow Metal
According to Song Xin, President of the China Gold Association (CGA), sufficiently high gold reserves are needed to buttress the yuan.
At a September seminar on gold in Beijing, Song told delegates:
“If the (yuan) renminbi wants to achieve international status, it must have popular acceptance and a stable value. To this end… it is very important to have enough gold as the foundation and raising the ‘gold content’ of the renminbi. Therefore, to China, the meaning and mission of gold is to support the renminbi to become an internationally accepted currency and make China an economic powerhouse… That’s why, in order for gold to fulfill its destined mission, we must raise our gold holdings a great deal, and do so with a solid plan. Step one should take us to the 4,000 (metric) tons mark, more than Germany and become number two in the world, next, we should increase step by step towards 8,500 (metric) tons, more than the U.S.”
Song’s predecessor, Sun Zhaoxue, recommended China increase official reserves and encouraged citizens to accrue gold. Some estimates peg private Chinese gold ownership at 12,000 metric tons.
Still, I don’t know that China necessarily wants to back its currency with gold, even if only at a token level. It makes more sense to buttress the yuan and enhance its stability than to move China to some kind of gold standard.
That’s because it would negate the massive advantages of operating a fiat currency system, not the least of which includes unrestricted money-printing to spend as the administration wishes.
But the motivation to build large gold reserves still runs deep. China just needs the right opportunity, and, with the way things are going, the United States just might deliver that…
Consider that there will be another financial crisis, it’s only a question of when. Former Treasury Secretary Tim Geithner warned of this himself, as I’ve discussed here previously.
If the United States is once again the epicenter of the next financial implosion (and, with things as they are, there’s not much reason to believe otherwise), it will be that much easier for other superpowers, like China and Russia, to swing the world reserve currency system into their orbit.
In this kind of scenario, the outsized role (and prestige) of the U.S. dollar would likely diminish just as quickly as China’s yuan, padded by immense gold reserves, would soar.
Here’s how you can take advantage of that outcome…
How You Can Win China’s Game
Right now, demand for gold, including from the official sector, is expected to remain robust.
Barclays Bank projects 2016 will see central banks continuing to be net buyers of gold. Barclays notes that China and Russia were the two biggest buyers, soaking up 95% of official sector purchases so far this year.
Barclays further highlights: “Their motives are likely to be strategic and long term… Both countries are short of gold in their total FX (forex) reserve portfolio. Russia has fewer than 15% of its FX reserves in gold, while China has less than 2%.”
In my view, the two great hedges against the next financial crisis are the yuanand gold…
For exposure to the Chinese yuan, you can buy the WisdomTree Dreyfus Chinese Yuan Fund (ETF) (NYSE Arca: CYB). The fund has $64 million in assets and trades 19,000 shares daily.
You might also consider the Sprott Physical Gold Trust (NYSE Arca: PHYS). It holds gold bullion that is fully allocated and stored at a secure third-party location in Canada, subject to periodic inspection and audits.
There is no levered financial institution between investors and the gold, either, plus U.S. investors holding for at least 12 months can benefit from a 15% capital gains tax versus the 28% rate with most precious metals ETFs.
Either of these are fantastic holdings, and I’m convinced that one day they’ll be indispensable.
But of course, the biggest benefit is the ability to stay liquid when China makes its move to bury the dollar.
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