Gold News

China Default, China Gold

Heard the one about Beijing wanting to own the world's No.1 reserve currency...?
U.S. MARKETS took more kindly to news of 'Chinese stimulus' this week than the Aussie market did, writes Greg Canavan in The Daily Reckoning Australia.
I'm not sure what all the excitement is about though. A cut to China's banking reserve requirement ratio is not overt policy stimulus. It's in part a way to offset an outflow of capital, which is occurring because of the slowdown in China's economy.
The biggest risk is that it frees up capital for lending to stock investors, thus giving the already heated Chinese stock market another blast of cheap money. Lending against land values is low risk compared to lending against equity values, which is what appears to be happening now.
Whatever the reality, the market decided to like the stimulus story overnight, and higher it went. After all, upwards is the path of least resistance for stocks right now. Most global equity markets are in an upward trend and this is likely to continue until a catalyst – like an exit of Greece from the Eurozone – occurs.
But that will never happen, right?
The news of China's stimulus measures, announced Sunday, overshadowed the default of a Chinese property developer, Kaisa Group Holdings Ltd, which occurred on Monday.
It is quite possible that news of the impending default forced the People's Bank of China's hand. Much better to have stimulus laden headlines than news of a default by a property developer.
According to Bloomberg, this is the first ever default by a Chinese property developer on Dollar-denominated bonds. The company missed a US$52 million payment, but the story didn't reveal the size of the default.
You're going to keep hearing about defaults in China in the coming years. And there will be more cuts to bank reserve requirements to try and plug the liquidity gaps caused by these defaults.
Another Bloomberg story hints at a different, but complementary angle, to China's strategy.
"China's push to challenge US dominance in global trade and finance may involve gold – a lot of gold.
"While the metal is no longer used to back paper money, it remains a big chunk of central bank reserves in the US and Europe. China became the world's second-largest economy in 2010 and has stepped up efforts to make the Yuan a viable competitor to the Dollar. That's led to speculation the government has stockpiled gold as part of a plan to diversify $3.7 trillion in foreign-exchange reserves.
"China may be preparing to update its disclosed holdings because policy makers are pressing to add the Yuan to the International Monetary Fund's currency basket, known as the Special Drawing Right, which includes the Dollar, Euro, Yen and British pound. The tally may come before the IMF's meetings on the SDR next month or in October, Nomura Holdings Inc. said in an April 8 report."
China doesn't want the Yuan to be the global reserve currency. It may be a benefit in the short term, but in the long term it's a curse, as the US will discover soon enough.
But they know a solid amount of gold reserves will buy a seat at the table when it comes to designing the next, non-US Dollar based, global monetary system.
Despite this, gold in US Dollar terms continues to languish near its lows. It's not trending higher like global equity markets, so Western traders (with a very short-term mindset) continue to ignore it. So do most Aussie investors, despite the fact that gold in Aussie Dollars is in a healthy upward trend, a trend that started late in 2014.
Aussie gold producers are making healthy margins at current prices, a fact made evident in some of the March quarterly reports that have just been released. These good results encouraged me to add another gold stock to the Sound Money. Sound Investments portfolio last week...and there will be more to come.
This week Evolution Mining (ASX:EVN) announced the purchase of private company La Mancha's Australian assets, which will make them Australia's second largest gold producer behind Newcrest.
Experienced gold players see good value in this market. Most other investors just keep buying the banks or Sydney property. You make money in the long term by going against the crowd...and then waiting for them to see what you saw previously. That will happen with gold again. I think now is the time to buy.

Greg Canavan is editorial director of Fat Tail Investment Research and has been a regular guest on CNBC, ABC and BoardRoomRadio, as well as a contributor to publications as diverse as and the Sydney Morning Herald.

See the full archive of Greg Canavan.

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