China is currently in some economic difficulty which could impact
internal stability and some feel that the global megapower is planning
to utilise gold to reboot and pick its way out of an economic meltdown.
By Lawrence Williams: One thing that is most apparent about China relative to virtually any
industry is that nothing is done without the approval, or instruction,
of government. When you have an enormous population of over 1.3 billion
- around 20% of the global population - the government's policies are
all aimed at maintaining order among its people, and for the past decade
or so this has revolved around massive internal growth. This has been
done, first by becoming the world's supplier of cheap goods, and second
the building of an internal demand economy to help support this massive
annual growth.
Nearly half the country's population has moved from the country's old
rural economy into a modern industrial one - but this is now seen as
faltering under massive bank debt, much of it in potentially bad loans
brought on by government-engendered cheap finance supporting the
country's internal manufacturing and infrastructural growth. Given the
Chinese state-owned company aims are not necessarily to make money, but
to provide employment, this may not be a sustainable economic model,
which could have some dire consequences for those companies,
particularly in the resource sector, which have been providing the raw
materials that help keep the Chinese factories maintaining uneconomic
production levels.
In the past we have seen Chinese companies begin to make inroads into
securing future supplies through investing in and taking over resource
companies around the globe, but while the emphasis has so far been in
respect of industrial metals to feed the manufacturing behemoth, we are
now seeing similar moves into the western gold mining sector - of which
the most recent example is China National Gold Corporation's interest in
taking over control of African Barrick Gold. And prior to that the
Zijin Mining takeover of Norton Goldfields among others. An earlier,
but perhaps less well flagged deal was China National Gold's offtake
deal with Coeur's Kensington Mine in Alaska whereby the mine's output is
processed in China, not in Alaska where the mine is located. It
would seem that these deals, or prospective deals, could be the tip of
the iceberg if some views on China's gold policy are correct.
These views suggest that China is hugely expanding its own gold
reserves, but doing so surreptitiously - a view we have expressed here
beforehand. Last time China announced a gold reserve update was in 2009
when it suddenly announced it held 1,054 tonnes of the yellow metal - a
75% rise from its 600 tonnes reported in 2003. If a similar time gap
is involved before China reports its reserves again, this will come in
2015 and some feel that the next reserve figure could show that China
has accumulated more than a thousand tonnes of gold over the period.
Indeed some have suggested a Chinese target of an additional 4-5,000
tonnes to bring it in line with some of the bigger Western gold holders.
There certainly have been a number of statements from senior figures
in China suggesting that the country should be increasing its reserves
and has been buying on price dips. Add to that China's own official
gold production, which may understate the actual figure, which has by
law to be sold to the state and one certainly can't rule out the
likelihood that reserves are being increased substantially Even when
gold appears weak there always seems to be a strong support level
indicating a very big buyer out there. Could that be China?
China is also rapidly moving to become the world's biggest importer
of gold, while exports are prohibited - and here again, although there
have been elements of gold fever in buying by Chinese individuals at
various points over the past couple of years, it is certainly
conceivable that some of this is being bought by official sources.
Now this is all surmise - but bear in mind that in a controlled
economy like China's the government tells you only what it wants you to
know, or believe, and everything is aimed at the preservation of the
state and the Chinese Communist party. There is little transparency in
the Western sense.
Take global gold reserves - China's official 1,054 tonne holding is
but a fraction of that of many Western economies. China is also said to
be sitting on a surplus of over $3 triilion in U.S. denominated assets -
which is, in effect, monopoly money. It would therefore be logical
that some of this could be converted into hard assets, notably gold,
which the Chinese see as a more stable ‘currency' than the U.S. dollar
which, in China's view, is continually being devalued by the U.S. Fed's
QE and associated monetary easing programmes.
Also, China has seen the huge advantages that have accrued to the
U.S. from its currency being used as the global reserve currency. China
would very much like to put itself in a position, perhaps not to usurp
the U.S. - although this would be the ultimate target - where it has a
dominant seat at the global trade table and there have been a number of
recent moves which reinforce this interpretation of China's aims with
the setting up of bi and multi lateral yuan-based trade deals, and the
development of precious metals exchanges where gold and silver will be
able to be traded in yuan. Indeed, if moves continue at the current
pace, and the country actually is growing its gold reserves at say 500
tonnes a year (which is certainly not impossible), by the end of the
decade it could push its way through to pole position in the global
economic stakes.
If it can do this it could then use its dominant currency base to
stimulate its own trading sector - and China largely lives by trade,
although its domestic consumer base rises by the day - much as the U.S.
has over the past few decades since the dollar usurped the pound
sterling as the global currency of note.
And, as we noted here back in 2009, China has also actively been
persuading its citizens to buy gold and silver through its banking
system, as well as through traditional traders, through TV, radio and
billboard advertising. Should China announce at some time in the future
a very significant jump in its gold reserves, this would really
kickstart another significant gold and silver price leg up, thus
substantially enriching its citizens who have been buying gold and
silver. Some may see this as China embracing the capitalist system -
but again we re-iterate that in China virtually no new initiative is
taken without government approval and backing.
It is actually probably too soon for China to take the step of
announcing a substantial gold reserve increase yet, but if the basic
scenario is correct China will thus continue to support the gold price
on dips until such time as it sees fit to upset the global gold apple
cart.
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