Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
Stock Market Bull Trap? January 22 Top Likely - 19th Jan 19
After the Crash, the Stock Market Made a V-shaped Recovery. What’s Next - 19th Jan 19
David Morgan: Expect Stagflation and Silver Outperformance in 2019 - 19th Jan 19
Why Brampton Manor Academy State School 41 Oxbridge Offers is Nothing to Celebrate! - 19th Jan 19
REMAIN Parliament Prepares to Subvert BrExit with Peoples Vote FIXED 2nd EU Referendum - 19th Jan 19
Gold Surges on Stock Selloff - 18th Jan 19
Crude Oil Price Will Find Strong Resistance Between $52~55 - 18th Jan 19
Stock Market’s Medium Term is No Longer Bullish. It is Now Mixed - 18th Jan 19
SPX and Gold; Pivotal Points at Hand - 18th Jan 19
Fable Media Launches New GoWin Online Casino Affiliate Site in UK - 18th Jan 19
The End of Apple! - 18th Jan 19
Debt, Division, Dysfunction, and the March to National Bankruptcy - 18th Jan 19
Creating the Best Office Space - 18th Jan 19
S&P 500 at Resistance Level, Downward Correction Ahead? - 17th Jan 19
Mauldin: My 2019 Economic Outlook - 17th Jan 19
Macro Could Weaken After US Government Shutdown. What This Means for Stocks - 17th Jan 19
US Stock Market Indexes Reaches Fibonacci Target Zone – Where to Next? - 17th Jan 19
How 2018 Was For The UK Casino Industry - 17th Jan 19
Gold Price – US$700 Or US$7000? - 16th Jan 19
Commodities Are the Right Story for 2019 - 16th Jan 19
Bitcoin Price Wavers - 15th Jan 19
History Shows That “Disruptor Stocks” Will Make You the Most Money in a Bear Market - 15th Jan 19
What Will the Stock Market Do Around Earnings Season - 15th Jan 19
2018-2019 Pop Goes The Debt Bubble - 15th Jan 19
Are Global Stock Markets About To Rally 10 Percent? - 15th Jan 19
Here's something to make you money in 2019 - 15th Jan 19
Theresa May to Lose by Over 200 Votes as Remain MP's Plot Subverting Brexit - 15th Jan 19
Europe is Burning - 14th Jan 19
S&P 500 Bounces Off 2,600, Downward Reversal? - 14th Jan 19
Gold A Rally or a Bull Market? - 14th Jan 19
Gold Stocks, Dollar and Oil Cycle Moves to Profit from in 2019 - 14th Jan 19
How To Profit From The Death Of Las Vegas - 14th Jan 19
Real Reason for Land Rover Crisis is Poor Quality of Build - 14th Jan 19
Stock Market Looking Toppy! - 13th Jan 19
Liquidity, Money Supply, and Insolvency - 13th Jan 19
Top Ten Trends Lead to Gold Price - 13th Jan 19
Silver: A Long Term Perspective - 13th Jan 19
Trump's Impeachment? Watch the Stock Market - 12th Jan 19
Big Silver Move Foreshadowed as Industrial Panic Looms - 12th Jan 19
Gold GDXJ Upside Bests GDX - 12th Jan 19
Devastating Investment Losses Are Coming: What Is Your Advisor Doing About It? - 12th Jan 19
Things to do Before Choosing the Right Credit Card - 12th Jan 19
Japanese Yen Outlook In 2019 - 11th Jan 19
Yield curve suggests that US Recession is near: Trading Setups - 11th Jan 19
How Unrealistic Return Assumptions Are Ruining Your Stocks Portfolio - 10th Jan 19
What’s Next for the US Dollar, Gold, Stocks & Bonds? - 10th Jan 19
America's New Africa Strategy - 10th Jan 19
Gold Mine Production by Country - 10th Jan 19
Gold, Stocks and the Flattening Yield Curve - 10th Jan 19
Silver Price Trend Forecast Target for 2019 - 10th Jan 19

Market Oracle FREE Newsletter

Bitcoin Analysis and Trend Forecast 2019

China Decision to Buy $80 Billion of Gold, the Dragon's Hoard

Commodities / Gold & Silver 2009 Jun 25, 2009 - 10:36 AM GMT

By: Michael_J_Kosares

Commodities

Best Financial Markets Analysis Article"We've got a situation where Geithner is smiling and has no choice but to stress the credibility and stability of the US financial and economic system, while the creditors [such as the Chinese] smile back and say they believe him, while at the same time giving hand signals to their reserve managers to get rid of these things [U.S. Treasuries]." - Neil Mellor, Bank of New York-Mellon


When China recently expressed its interest in purchasing $80 billion in gold (about 2600 tonnes), it profoundly altered the gold market's long-standing synergy in three significant ways: 

First, it used to be that the threat  of central bank gold sales would damage market sentiment. Now the threat of significant sales has been met with the threat of significant purchases. 

Though the dragon hoard depicted by our good friend, Ed Stein is not yet a reality, China can back its desire to own gold with plenty of cold hard cash. At nearly $1.4 trillion in dollar-based assets, and almost $2 trillion in total reserves, $80 billion would consume a paltry 6% of China's dollar reserves. At the same time 2600 tonnes translates to roughly one-third the U.S. gold reserve -- a significant ambition by any measure. To give you an inkling of how this new synergy might work, when the International Monetary Fund announced recently it would like to sell about 400 tonnes of gold, China joined India in publicly pressing the IMF to sell its entire 3200 tonne hoard. On that news the gold market, which had been in a slow slide as a result of the IMF's announcement, turned and took another run at the $1000 mark.

Second, by becoming gold's most prominent champion, China mounts an aggressive defense of its domestic gold mining industry, and by proxy the rest of the industry as well.

Few people know that over the last few years China has quietly become the world's leading gold producer.  Most of that production never leaves China's borders, but goes instead to the national reserves as a hedge against its currency holdings. China, by the simple expedient of defending its own interest, accomplishes much for the gold mining industry as a whole. By posing as a gold buyer of last resort, ready, willing and able to scoop up any sizable offer, China may have very well put a floor under the market price, though we are too early in the game at this juncture to predict what that price might be. There is no question, however, that China has put a floor under long term gold market expectations. One would have to go back to the first Central Bank Gold Agreement in 1999, which strictly limited the sale and leasing of central bank gold, to find an equivalent organized effort in defence of the long term price trend.  Many feel that the original CBGA launched the current bull market in gold, and time will tell whether or not China's bold entry onto the gold scene will launch its second leg.

If you would like to broaden your view of gold market news and analysis, please feel welcome to join our free NewsGroup to receive by e-mail periodic gold news alerts, USAGOLD Market Updates, and relevant commentary like this one!

Third, by elevating gold to prominence in its national reserves, China lays the groundwork for the yuan's future use as a prominent reserve currency.

There is little doubt that China would like to make the yuan the currency of choice in the East and a strong measure of gold in its reserves would do much to enhance that possibility. For a comparative history, one would have to go all the way back to the late 1960s and the time of French president Charles DeGaulle. "The Last Great Frenchman" thought it best to hedge the national interest and elevate its future economic prospects by purchasing gold.  A substantial amount of metal subsequently left U.S. coffers for European national balance sheets including that of France. DeGaulle was later vindicated when gold rose twenty five times in dollar terms over a short ten year period from $35 an ounce to $875 (1971 to 1980). Some of that same gold would later play a key role in the establishment of the European Union, the European Central Bank and the euro, Europe's currency. China, by its recent actions, appears to have similar intentions both in terms of gold and the yuan.

__

In one fell swoop China has done much to alter the standing gold market synergy. When Congressman Mark Kirk announced China's desire to purchase gold during an interview with Fox News' Greta van Sustern, he noted "across across the board - in private - substantial, continuing and rising concern." Chinese leaders, he added, were sharply critical in private of the US Federal Reserve's policy of "quantitative easing," the modern equivalent of printing money. Kirk went on to say that rising concerns about the dollar and anticipated inflation had prompted China to: "[fund] a second strategic petroleum reserve and they plan to buy $80 billion worth of gold. . . Both of those investments only make sense if you expect significant dollar inflation."  

In the years to come, China will continue to steadily build its gold reserves through domestic production. It will also attempt to purchase whatever gold it can on the world market through official sector purchases or whatever additional means it finds at its disposal. In the process it will become the fire-breathing dragon in the gold market's living room - ubiquitous and formidable, a presence that cannot be ignored. At the same time, it will find itself in stiff competition for the available physical gold with an international public which harbors the very same concerns for their own portfolios that Chinese officials expressed to Representative Kirk. Few among gold's growing legions would disagree with China's logic, or its now publicly voiced desire to hedge a potentially disastrous collapse of the dollar.

Related reading: Is this the death of the dollar? by Edmund Conway/The Telegraph/June 20, 2009 - Important perspective

By Michael J. Kosares
Michael J. Kosares , founder and president
USAGOLD - Centennial Precious Metals, Denver

Michael Kosares has over 30 years experience in the gold business, and is the author of The ABCs of Gold Investing: How to Protect and Build Your Wealth with Gold, and numerous magazine and internet articles and essays. He is frequently interviewed in the financial press and is well-known for his on-going commentary on the gold market and its economic, political and financial underpinnings.

Disclaimer: Opinions expressed in commentary e do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. Centennial Precious Metals, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD - Centennial Precious Metals does not warrant or guarantee the accuracy, timeliness or completeness of the information found here.

Michael J. Kosares Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

gold purchase
16 Jul 09, 04:56

China says that the gold is a real money so it's a worth purchasing. so we sould purchase the gold as the future point of view. watch the free viedo clips on gold IRA- http://www.youtube.com/watch?v=wqGe87WqPjA


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules