China is now the 6th largest gold holder in the world...
DO YOU REMEMBER the old expression, "I wouldn't do that for all the tea in China"? asks Byron King for the Rude Awakening.
People used to associate China with tea. But now it's time to associate China with gold, and a lot of it. Because the Chinese recently announced that they control over 33.89 million ounces of gold for monetary purposes. That's an increase of 75% in Chinese Gold Bullion holdings over the past six years.
This kiloton of Chinese gold makes the Middle Kingdom the world's sixth largest holder of the yellow metal. The United States – courtesy of President Roosevelt's gold confiscation in 1933 – tops this list of the world’s largest gold holders, followed by Germany, the IMF, France and Italy.
How did the Chinese accumulate so much gold? China purchased it over the past six years through its State Administration of Foreign Exchange (SAFE). SAFE is quite distinct from the People's Bank of China (PBoC). The SAFE purchases meant that the gold did not appear as part of China's officially reported monetary reserve figures.
The Chinese gold purchases, evidently, were part of a slow and steady buying program between 2003 and the present. It makes you wonder what the Chinese were thinking back in 2003. I happen to know, courtesy of an acquaintance at the Naval War College, that the Chinese were quietly forecasting that the US would destroy its Dollar by going to war in Iraq.
At any rate, SAFE bought all of the gold from domestic Chinese suppliers, so the overall impact was minimal on the international gold markets. Now the Chinese gold holdings have been transferred from the SAFE books to the PBoC. Hence, the official announcement. And here's what REALLY matters.
China is monetizing its gold!
This SAFE-to-PBoC transfer marks a profound decision by Chinese government leaders. Obviously, the Chinese government had been Buying Gold over the past six years. But the Chinese have been engaged in an internal debate over whether to add the gold holdings to the official Chinese monetary reserves. That is, if the gold was not "monetary", then it was just another non-monetary investment commodity like iron ore or copper or petroleum.
But now, with the announcement by the Chinese Central Bank, it appears that the debate is resolved. The gold has been added to Chinese monetary reserves. This action by China is part and parcel of an under-the-radar global effort to rehabilitate gold as a monetary reserve asset.
Gold has not been a factor in global trade and currency exchange since the late 1960s. But there's a powerful movement afoot in the world to reestablish gold as part of an international monetary system. It's because the US Dollar has been so badly mismanaged over the decades. No, you won't read about it in your local newspaper, or even in the standard, mainstream business media. But that movement is out there. It's happening.
At the same time, for many decades, the US establishment has pooh- poohed the "gold effort". Policymakers, politicians, bankers and academics were collectively smug in their empirical certainty that, as Lord Keynes once noted, "Gold is a barbarous relic."
But apparently, the Chinese don't agree. Not anymore. Indeed, the Chinese may well be thinking that the US Dollar is the real "barbarous relic".
So now the Chinese are primed to begin using gold as a monetary asset. What's the practical impact? I expect to see central banks worldwide start to add gold to their monetary reserves. The floodgates are opening. The PBoC and other central banks from here to Timbuktu are going to become net purchasers of gold in the years ahead. And people who own physical gold, as well as shares in well-managed mining companies, will benefit greatly.
One important commentator on gold prices is Peter Munk, founder of Barrick Gold, the world's largest gold-producing firm. Recently from Switzerland, Munk remarked, "I have to think [gold prices] are going to be significantly higher than last year, just like last year was higher than the year before."
According to Munk, the recent injection by the Federal Reserve of new currency into the money supply is an "enormous, enormous inflationary factor" for the dollar. This will make gold and silver "more and more desirable." In addition, "Gold has got a very strong and stable support right now as long as we have this enormous uncertainty out there. And I think this uncertainty will probably last for a while, because I don't see any major catalyst that can turn this around."
Finally, Munk said, "Every year in the last three years, as the world becomes less and less secure in terms of normal investments and people lose faith and confidence in bonds, stocks, secured debt instruments, people turn to gold. It automatically attracts people in direct proportion to their fear, and that is fear of losing their money."
Founded by Munk in 1983, Barrick Gold is among the world's largest gold miners. Barrick has pursued growth through judicious expansion and a continuing process of acquisitions. "Barrick has grown," said Munk, "primarily through an aggressive acquisition program in the last 25 years. So of course, we'd be on the lookout all the time for strategic acquisitions or mergers...The major gold deposits throughout the world in the main have already been found, so it's getting more and more difficult, and that's why you see global gold production heading downward, despite higher prices and increased spending on production."
The bottom line in all of this is that you should be sure to pad your portfolio with gold and silver, both the physical metals and shares in quality mining companies. America’s political leaders have promised to fight recession by debasing the dollar. That may be the one and only political promise you can ever really trust.