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China’s Gold Purchases Another Wild Card in Market

June 8, 2009 by  

China’s Gold Purchases Another Wild Card in Market

It wasn’t long ago that I was noting how the Federal Reserve’s sudden embrace of quantitative easing, combined with the orgy of spending in Washington and international calls for the usurpation of the dollar as the world’s reserve currency, had sent gold soaring.

In more recent days, the trend has accelerated. This time, Washington’s increasing involvement in the economy, and the politicization of American business, has sent overseas investors fleeing the dollar. Capital goes where it is safe and well-treated, and right now there are safer alternatives than the U.S. for foreign capital.

In short, investor sentiment has shifted from fear of financial collapse to fear of rampaging inflation and a dollar collapse. And gold has been the beneficiary, as it has taken off on a dizzying rally back toward $1,000.

While the long-term picture for gold remains very bright as the global supply of fiat currency is multiplied over the coming months and years, there has been another recent development with important implications not only for gold, but the entire world. To wit: China has announced that it has been secretly buying gold since 2003.

In an interview published by the official Xinhua news agency, Hu Xiaolian, head of the State Administration of Foreign Exchange, revealed that China had purchased 454 tonnes of gold since 2003, raising its gold reserves by about 75 percent, from 600 tonnes to 1,054 tonnes.

That ranks China fifth in official gold holdings among nations, although the IMF and the SPDR Gold Trust ETF (GLD) still hold more than the Middle Kingdom.

The gold bulls seized upon China’s revelation as having tremendous bullish implications for the metal.

After all, the nation increased its gold holdings by three-quarters, siphoning hundreds of tonnes from the market. But the gold bears were quick to assert that China’s gold purchases weren’t a big deal, since their foreign currency reserves grew at about the same pace. As a percentage of its overall foreign reserves, gold stayed virtually constant from 2003 to today, averaging around 1.6 percent to 1.7 percent.

I think both sides are missing the point here. The significance of China’s purchases is more bullish than the bears would admit, and less dramatic than the bulls would like. In short, the importance of China’s admission isn’t what it has done, but what it can now and likely will do in terms of gold purchases.

Prior to this announcement, analysts could only guess as to China’s intentions as far as gold purchases. Many bulls hoped the nation was buying, many bears dismissed the idea… but no one simply assumed that China’s inscrutable leaders were accumulating gold along with U.S. dollars.

Now that they’ve come clean, the outlook for global gold supply and demand is fundamentally changed, for a number of reasons.

First off, when you take this announcement in context with the recent, repeated calls by China’s leadership for the ouster of the dollar as the global reserve currency, it seems likely that the stage is being set for a reduction of their dollar reserves in preference for, well, gold.

The upside posed by such a development is significant, but not earth shattering. It’s true that Western nations hold an average of 15 percent of their reserves in gold, and an increase in China’s gold allocation to that level would set the market afire. But, from a practical standpoint, that just won’t happen, at least not in anything short of a glacial time frame.

China simply couldn’t buy gold in the quantities, or at the prices, appropriate to lift gold to 15 percent of their reserves. Still, it appears that China’s leadership is quite motivated to reduce their dependency upon the U.S. dollar, and increase their holdings of gold and other tangibles.

In fact, if there is any open secret regarding official Chinese purchases recently, it is their stockpiling of strategic commodities, particularly copper. Copper prices have benefited greatly from China’s aggressive purchases this year.

One can rightly ask, is gold next on the shopping list? And has the official chatter regarding gold and the dollar simply been Beijing’s warning to Washington and the rest of the world of what is coming?

Good questions. And we’ll get the answers when China wants us to get them, and not before. You can bet any announcement will come after their major purchases are done.

A second interesting point regarding China’s purchases is that all of the supply/demand analyses of the past six years have been wrong. Because China’s purchases were unknown, and therefore couldn’t be credited to that nation or official purchases in general, other demand categories were credited with the 454 tonnes China was buying.

Hu stated that the purchases came from domestic production, but it seems likely that some significant percentage had to come from outside the local market. Regardless, assuming that aggregate global supply and demand figures over the time period are accurate, then it makes no difference whether the purchases came from gold inside or outside China’s borders.

So we can assume that global jewelry and investment demand totals since 2003 weren’t as high as originally envisioned — because we can subtract 454 tonnes, in some mix, from these categories.

One can argue that this is bearish. I’ll take a more optimistic viewpoint: It shows that these demand sources have been less significant so far, and therefore have more room to grow.

And if China’s purchasing program accelerates, or even if it remains constant, then increases in other demand categories will have a much more pronounced effect on the overall market.

All in all, it has to be encouraging that China has been buying gold, and is likely to continue doing so, while the nation publicly bashes the dollar.

Brien Lundin

is the editor and publisher of Gold Newsletter, a publication that has ranked among the world's leading precious metals and resource stock advisories since 1971. To learn more about Gold Newsletter, visit www.goldnewsletter.com. Mr. Lundin is also the host of the famed New Orleans Investment Conference, the world's oldest and most respected gold investment event. To learn more, visit www.neworleansconference.com.

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  • Bill Getson

    Your “Results”of the voting on your questions are the most BS I have come across in recent times. Obiously, you are right-wing extremists who are associated with the Republican Party, WHICH IS RESPONSIBLE for ALL the bad things happening to the USA, due to the OBCENE way they have RULED this country over the previous stwo administrations.

    PLEASE: Delete me from your mailing lists. You are now on my SPAM list and messages from you will be put there for me to delete, should you continue to send me any further PROPAGANDA !

    • Frank

      “Right wing extremists”… Isnt that term the result of Propaganda? LOL

      Blaming one political party for this mess is really unproductive, and really wrong…especially since they all have been OK with a Privately owned bank controlling our economy and our lives since 1913.

      Put that in your un-informed un-aware pipe and smoke it.

    • rob

      were you alive or awake when jimmy carter almost destroyed this country.well barack obama is jimmy carter times 100.wake up .

  • JB

    What form of gold do you recommend Americans should be stockpiling — coins, bars, bullion, stocks, ETFs, or what?

    • MIRIAM GAGE

      interested in what is the best form of gold to have. Have been told it is the raw gold, not the coins–who should I beleive?

    • 13th Gen. American

      I recently bought gold and talked to 3 different companies and they all said rare coins. The governmenttook all gold bullion away from people back in the 30′s? Cant remember exactly date but we got to keep rare coins because of its collectors value. They cost more than bullion but if the government takes it away again. and they can, the coins will be worth even more. I dont have a lot but its good to have something because it seems our dollar will be as good as TP soon.

      • Lee

        Where were you when Roosevelt took us off the gold standard. He took stole our Gold? He took our collectales, our rare coins, our jewelry all for His friend at the bank.

        If you can read, read read ” The creature from Jekyll Island” all this cow dropping was planned years ago.
        Get real Did you really think anyone can be as dumb as Bush 43 and get away with it. Do you really believe Obamma is in charge?

        The only people dummer than politicians are the 14th amendment citisens of corporate UNITED STATES.

        Thomas Jefferson saw this coming in the 18th century and NO ONE Liaten the either.

        I know because “I’m from the government and I am here to do you a favor. “

        • 13th Gen. American

          Well altho I appreciate the thought I do know this from my bible that no man will be able to buy or sell without the mark of the beast.Rev:13,16-18. So I know there will come a time when none of it matters. But God also shows us in several places to save up in good times for times of trouble. So saving some gold for when times get bad is just as smart as saving some food and being prepared. Im not saying dig a hole and hide in it but we are to be smart about it. Also we are to rely on God through Christ to see us through the times ahead so It doesnt matter what you or the Government or the united nations or the anti-christ says and does because it is GOD who is ultimatly in charge and HE is the one letting stuff happen to bring about HIS plan. And by the way they didnt take everything. I wasnt there but my father was and one should know who lived through it.

    • http://www.personalliberty.com/ Brien Lundin

      Dear JB, Miriam Gage and 13th Gen. American:

      The simplest and most obvious way to buy gold is in its physical or bullion form. Bullion refers to the metal minted into coins or cast in bars with the weights marked on them. There are many gold coins that have been or are currently being minted.

      The gold coins we recommend you buy are the American Gold Eagles, Canadian Maple Leafs, African Krugerrands and the Australian Kangaroos. We prefer these because they are stamped in English, have their gold content stamped on them, come in convenient, well-known sizes (1-ounce, half-ounce, quarter-ounce and one-tenth-ounce) and sell at small premiums over the value of their gold content.

      Gold bars are growing in popularity for those interested in accumulating gold. They are available in 1-ounce, 10-ounce, kilo and 100-gram sizes. All are .9999 fine gold, which means they are 99.99 percent pure.

      Larger quantities of gold can be purchased on the Comex, the commodity division of the New York Mercantile Exchange on which gold, silver, copper and aluminum are traded. This is where futures contracts of gold and silver are traded, and it is here where you can buy gold and/or silver futures or actual gold and/or silver bars.

      Generally, we recommend you avoid collectors’ or numismatic coins, unless you also collect such coins as a hobby, and deal with a firm you know well and trust. The numismatic market is highly complicated and demands that investors take considerable time and effort to educate themselves, and to shop for the best prices, if they hope to be successful. In addition, it sometimes moves independently of the precious metals markets, so it may not achieve the investment goals you are seeking.

      One technique used to promote the sale of high-priced “collectors” coins and numismatics is to instill the fear that the Federal Government can confiscate non-numismatic coins but will be unable to confiscate numismatic coins. Many numismatic dealers promote this fear. The belief that collectible coins would be exempted from government confiscation comes from President Franklin D. Roosevelt’s executive order that exempted “gold coins having a recognized special value to collectors of rare and unusual coins.”

      However that order didn’t specify what constituted a collectible coin. And if the government wants to confiscate any or all coins or gold, all it has to do is pass a new law, as it has done in the past, or simply begin confiscating it without the authority of law.

      To magnify the gains in precious metals, buying stock in mining and exploration companies is recommended at this time. There are a number of high-potential companies that we are currently suggesting to readers of Gold Newsletter. These are mostly small cap stocks, and some of these have done quite well in recent weeks. However, specific recommendations are reserved for our paid subscribers. If you are interested in a subscription, go to http://www.goldnewsletter.com.

      • 13th Gen. American

        OH I see the 3 different companies that I did not name were just scaring us to get people to buy and they were wrong. Also the several articles unrelated to the company’s saying the same exact thing were wrong. You however who are advertising here are right and want to sell us your gold. Ill stick with the ones I went after instead of the one that comes after me. By the way none of the other business made us PAY for info. Therefore I suggest anyone interested go to the one Glenn Beck or Rush or any other of the others have already investigated or to Blanchard. They will give you prices and info for free and sell you bullion too if you like. They all will also send you FREE info.

  • http://Personellibertydigest Jeff Barker

    I understand that Fort Knox vaults are mostly empty, maybe enough gold to build a couple of circuit boards. This bookkeeping play money of ours will eventually fail and become basically worthless. As the world pushes ever so closer to fullfilling the Biblical prophesies of the end times, It is interesting to note that continental North America is the only continent missing in the Bible. Could it be at this “End times” time frame that we no longer matter or have we plainly cease to exist?

    • 13th Gen. American

      One theory is we are under the British empire mentioned. Also there are a lot of Christians, not just religious, people in America and if we are taken up before the worst gets here(fingers crossed) then both will be true.

  • ONTIME

    It is obvious Frank has a liberal tendency to name, separate and demonize all his political fears. Grow up Frank.

    The PRC has been using the the money they are making of the interest from thier loans to us wisely by investing minneral and metal commodites all over the world and expanding their military reach to protect their interest. We, the U.S. are in a real pinch financially thanks to some of the most ignorant use of tax payer money ever devised and investment thinking that ignores all laws of economics to gain government power grabs. For every dollar this nation borrows to date, we are now paying as much as fifty cents on the dollar, the chinese are making that much and more and we are a boon to their banking system as well as their economic improvement. If you decide to purchase gold in any form you will need to make sure you can collect and not be deluded by a false fund, check with your broker.
    Learn to speak mandarin, you may need it.

    • Frank

      hahaha….”Liberal Tendency”….is that suppose to bait me? LOL

      Better switch from whatever it is you are smoking..its causing you to lose the ability to read and comprehend.

      • 13th Gen. American

        you replied. you took the bait.

  • s c

    Let me make this short. Our ‘magicians’ at the Fed, in Congress and the White House know what’s coming. “It” has been engineered. Soon, the dollar will be history, and America will have what Germany endured many years ago. Americans will then be able to paper
    their walls with dollars. You can eat it. You could call it ‘art.’ You might even use it as a ‘personal’ item in your bathroom. When this collapse happens, REMEMBER the many hundreds of ‘leaders’ who helped “it” come to pass. Think of these ‘leaders’ as Darwin’s
    children. They are worthy of everything they have earned. America, it would not be ‘fair’ to deny them their reward.

  • Domenic

    There is no difference between parties their all hands in puppets of the same master. Who is the master? Follow the money… United Nations is where it stops the US is destroyed by corporations that subscribe to global economies. The introduction of cheap almost slave labored goods brought into the Mexico / USA/ Canada to undermine our industrial powerhouses. Why can’t anyone see that this is how the English old imperial system worked in the past with the introduction of slave labour into the south to destabilize the US. Have we forgotten the way imperial shipping took china with opinium markets?

  • Carol

    My husband and myself has been saying the same thing that rob stated but this time it is going to twice as bad because in many ways there is no way to stop him.

    His wife is even worse she is not what she is pretending to be don’t forget his politics is grounded in Chicago and they aren’t exactly on the up and up there.

    He can’t even tell the people his real name and where he was really born so how do you think he going to run the most beautiful country in the world but into the ground and that is a fact.

    MAY GOD BLESS US ALL NOW AND FOR ALL TIME FOR THE REST OF OUR LIVES THAT IS IF HE WANTS TO!!!

    • Charles B

      The Bible tells us that God will bless the nations that support Israel and He will turn his back on the nations that turn their backs on Israel. Obama has already taken major steps toward removing US support of Israel during his recent trip to the middle east. There are many people in this nation that do not approve of that move.

      I do have some gold coins. I do not know what their current value is. Some economists have recommended that 10% of your portfolio should be in gold and precious metals. If I had done that about 2 years ago, I probably would still be about even rather than having my net worth decrease about 30%.

    • Lee

      WAKE -UP!

      Where were you? God Has Blessed America but whom of us gave thanks?

      There are atleast 31 States ready to recall their representitive in Washington.

      That will stop our political crooks and the other Bankers.
      Don’t believe it then check out Glenn Beck at Fox News.

  • UtopianComrade

    Obama Comrade is going to sale The USA as a Chincong Territorry.

  • sam

    Ok I hear all this talk from Glen,So why have we not sued Oboma and the white house to get our Constitution back,have we lost the word recall or constitutional convention.get them out before it is to late.

    Use some of the bailout money to pay the lawyer.by the way it is our money.
    Sam

    • David

      Beck nailed it yesterday. WAKE UP AMERICA before it’s too late.

      Recall those representatives. The dems have an agenda to put in place before 2010. Unfortunately too much damage will be done by then unless the blue ticks wake up…and they have on cap & trade in the midwest because the public is getting educated what it will mean to their personal utility bills. Oh but obama was not going to raise taxes except for the top 5%….my butt.

  • Rennie

    I think Canadian coins are the best at this point, (never thought I’d see that), silver at least has medicinal properties, but you can’t eat gold and if the doomsday dollar scenario ever plays out like some suggest, everyone will be trying to pawn gold off for essentials like food, clean water and weapons to protect yourself and family. China will and has sold off gold when the dollar declines just the same as central banks in the rest of the world do. The confiscation or simple inaccessibility of what you have in your bank safety deposit box is not a plus either, nor is bad people thinking you have a stash of gold at home. I’m suggesting you invest in the means to survive, food, water, medicine, security and alternative energy but most of all KNOWLEDGE. Make sure all your friends and family members know the basics of survival, edible/medicinal plants, etc. and how to grow a garden and orchard, if you have to rip out the flowers and plant fruit trees and berry bushes to supplement your diet if you can. Don’t make it a special project you get tired of and give up on, work it into your daily routine, common sense and healthy habits. Invest your money in simple self suffiency measures that make life healthier and easier no matter what comes. It will only boost your property value, but don’t hinge everything on local utilities, you have to be able to exist off grid, off municipal gas/water/sewer, or you will be in an untenable position if things go really bad. A woodstove, ax, handsaws, etc. will be worth more than a oil furnace or pellet stove, more work but more available supply, and there will be plenty of idle hands capable of cutting and hauling wood. Good quality fastening hardware, fencing wire, small game traps, hand tools, drill bits and saw blades only go up in value, pick them up at a bargain when you can, even if you only oil them and hang them up in the garage attic. If we hit a prolonged crisis, people will be trading gold for tools. Safe storage for food reserves in case someone breaks in, either a root cellar or hidden pantry is advisable. A bow or crossbow for hunting is silent, gunshots will draw attention, (as guns will become a form of currency and especially desired by the worst elements), and it’s easier to make arrows than bullets. Bicycles, wheeled carts, etc. anything not requiring gasoline/diesel needs to be kept safe and usable, wheels and tires especially. I would prefer being off main roads or rail lines which would be conduits for roving masses, and where overflowing sewers wouldn’t pool, waterways downstream of sewer plants will also be polluted, so make sure you are away from that. Consider these investments before you bury a jar of gold in the backyard. If you do bury coins or guns or anything, bury junk to help confuse metal detectors.

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