China, that is. But is there enough Gold Bullion around to diversify Beijing's Dollar position...?
The BIGGEST HOLDER of US Treasury debt isn't happy, writes Byron King at Whiskey & Gunpowder.
And why should they be? They're sitting on the sidelines holding US Treasury bonds worth $797 billion. That's quite a chunk of change.
I'm talking, of course, about China. The Chinese have been the biggest foreign creditor to the United States and in recent statements they've made it clear that Washington needs to maintain the value of the Dollar.
"We have made a huge amount of loans to the United States. Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried," said Chinese Premier Wen Jiabao.
It's estimated that around 50% of China's total reserves are held in US treasuries. And they know that the reserve currency they hold is depreciated with each passing day.
With so much riding on the price of the Dollar you can bet that Beijing has been keep a close tally on America's spending – and the results can't be pleasing.
To say the least, Chinese faith in the Dollar is feigning.
And I'll give you one guess as to where they are going to spend their $797 billion nest egg...Gold Bullion!
Right now China is 6th on the list of world gold holdings with around 1,000 tonnes of gold reserves. Not bad right?
When you look closer at the statistics you can see that China has a mere 1.9% of its total reserve holdings in gold. Compare that to the US with 77% and you'll start to see China's future motivation.
China is in the market for a reserve currency that's stable. And when it comes to stability nothing glitters like gold.
Need proof? Look no further than another developing world powerhouse...India.
Recently India made a bold move to start protecting itself from the US Dollar and fiat currencies in general...
News broke that India made a huge gold purchase from the IMF – somewhere in the neighborhood of 200 tonnes.
Previously, the government of India held 350 tonnes of gold reserves. This 200 tonne purchase is a 57% increase in India's reserves. Now that's what I call a stand against paper currency!
The Indian transaction may be the largest single central bank purchase of gold ever. The only comparable event was the US government seizure of gold from circulation within the nation back in 1933, along with steady US government purchases in the 1930s and 1940s.
I spoke with an acquaintance of mine who works in the "financial" side of the US government – I cannot say what Cabinet department, but his office has a view of the White House.
I asked why the IMF sold the gold to India, and not China. My acquaintance replied:
"It's all about balance. India holds a lot of US Treasuries and needs gold to diversify its assets. We can't let all the IMF gold go to China and leave India in the dust. China is already building up its gold reserves due to being the No. 1 gold producer in the world and still a net importer. Besides, if the news hit the wires that China just bought all the IMF gold, it would crush the Dollar. So the deal was that India could buy 200 tonnes."
Put it all together and the global outlook for the US Dollar is dreadful. As time passes more countries will try to escape the depreciation of the Dollar – and that leads them to one option for wealth preservation: gold.
Okay, so no one wants paper Dollars and instead they want gold – that's easy right? Not so fast...
Just like the "peak oil" phenomenon, we're headed for "peak gold." It's all about how much gold is left unprocessed underground. The more we take out, the harder it is to find more. And the harder it is to get to.
For instance, miners used to pan for gold in streams. Today, just to get enough gold for a wedding band, you need to crush up to 20 tons of rock.
And remember, gold isn't just for jewelry, Gold Coins, or bars of bullion. Gold goes into computers, cell phones, and satellites. It's used in medical lasers, industrial lasers, and in spacecrafts. It plays a major role in medical research. It's even used for treating some diseases.
According to the World Gold Council, the world mined 2,414 tonnes of gold in 2008 – 64 tonnes less than the year prior. It was even less gold than mined in 2006.
Meanwhile, the amount of gold used in jewelry and industry alone topped 2,186 tonnes – add that to demand for bars and coins (which has really been ramping up lately) and you'll see that, by necessity, at least 425 tonnes had to come into the market – most likely by central banks out of their dwindling hoards, a practice that cannot continue indefinitely.
And that's not even including industrial use or the demand from vastly popular gold investment holdings like ETFs!
In fact, when you get down to brass tacks, the supply outlook for gold is down right dismal.
Over the past 10 years large Gold Mining discoveries have been inexistent. The discoveries that are being made tend to be in more remote and less geopolitically attractive areas.
Tough new environmental laws and 20 years of low mining investment don't help. But it's really geology that's conspiring against the miners most. Nobody can find the big gold deposits anymore. It looks like they're all tapped out.
With Gold Prices up, they're looking. More holes open up in the ground. More tons of rock go through the mills. But so far, the average quality of the gold they're finding has gone down.
The low hanging fruit of the gold mining universe – the easy deposits and rich mines – have started to disappear. Gold's already rare. But it's getting more rare by the day. This rarity is running into increasing demand. There isn't a more fundamental argument for rising prices. And if the US Dollar continues to plummet there'll be no stopping the yellow metal's upward charge.
Again, it's economics at work. Gold is priced in Dollars, so as the currency becomes less valuable, the metal naturally becomes more valuable.
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