Tag Archives: silver

Implications of China’s Appetite for Gold

China’s appetite for gold is featured in this post found on the gold-eagle forum, and apparently not available anywhere else (I did some searching on bing and google to verify). This one is worth reading, IMO.

Money quote (pardon pun): China’s dire need to diversify its foreign reserves will propel the price of gold to unprecedented new all-time highs … regardless of what action the US Federal Reserve bank takes in cutting the Fed Funds rate.

Well all RIGHTY then!

It has been obvious for many years. The fundamentals are all in alignment, and grow stronger by the month. As admirably as gold and silver have performed over the last 10 years, the best is clearly yet to come.

—alan2102

…………………………

http://www.gold-eagle.com/cgi-bin/gn/get/forum.html

(Ho_Yen_Tsi) Sep 17, 17:28

Monumental ramifications of China’s necessity to buy gold to diversity foreign reserves

BEIJING — China should take steps to diversify its holdings of reserves out of low-yielding U.S. treasuries and into other currencies as well as long-term strategic assets, economists said in remarks published Friday.

As China’s foreign exchange reserves have grown well past $3 TRILLION, a vigorous debate has emerged among domestic economists on the appropriate management of the funds.

Qin Chijiang, a professor at the Central University of Finance and Economics in Beijing, said Beijing should use its foreign exchange to make long-term investments in industry and finance to achieve higher returns, according to the central bank-backed Financial News. He added China could also use foreign exchange reserves to boost its natural resource and technology stockpiles.

“All central banks are trying to diversify…we have had a very clear diversification plan for several years,” Chinese central bank Governor Zhou Xiaochuan said Thursday in Frankfurt, according to a Reuters report. Zhou said that the central bank is considering lots of instruments of diversification, according to the Reuters report.

The report sent the U.S. dollar sharply lower versus the euro in trading Thursday on concerns China would move out of dollar assets. Economists believe Chinese demand for U.S. debt has been a major factor in keeping U.S. interest rates low.

Peking University researcher Dou Erxiang, in the Financial News article, was cited as saying China needs to build a new management system for its foreign exchange reserves to independently manage the funds in a more market-oriented way.

Dou added China should diversify away from U.S. dollar assets and should moderately increase its holdings of euro and non-dollar assets.

In recent months, Chinese State Television reported that the country’s foreign exchange reserves had past the $3.2 TRILLION mark. In fact China surpassed Japan LAST YEAR year as the world’s biggest holder of foreign exchange reserves.

********China’s dire need to diversify its foreign reserves will propel the price of gold to unprecedented new all-time highs…regardless of what action the US Federal Reserve Bank takes in cutting the Fed Funds rate. Whereas in the past the price of gold may have been a function of US interest rate levels and/or the dollars decline, going forward it will be forged mainly by China’s dire need to divest itself from ever growing US dollar reserves due to relentless trade surplus.********

In recent months much news has been aired about Beijing’s keen interest in diversifying its material FOREX risk, since most of it is in the US dollar. I believe the greenback comprises well more than 70 percent of its total foreign reserves.

But no one has really delineated the monumental ramifications of China’s necessity to buy gold to diversity foreign reserves. Consequently, one took a close look at the pertinent numbers. To appreciate the findings it is necessary to show the following basic data:

– China has $3.2 TRILLION in foreign reserves, which grow continuously by the hour (in numbers that is
$3,200,000,000,000). About 70% of these reserves are concentrated in the US Dollar (ie nearly $2 TRILLION).

– China’s gold as a percent of total foreign reserves is about 1%….and it is reported China plans to increase the gold percentage by an additional 4% to a 5% goal.

– There are approximately 34,000 troy oz in a tonne

– Total annual gold production in the entire world is a mere 2600 tonnes

To increase gold reserves by 4% China needs to buy $128 Billion in gold on the open market. THIS IS NOT POSSIBLE WITHOUT CAUSING THE PRICE OF GOLD TO SKY-ROCKET. However, for the sake of this illustration, let’s assume China could buy it all at a fixed price of $1800/oz. In this event China would acquire approximately 70,000,000 ozs, equivalent to about 2,100 tonnes.

Let’s put this into perspective. 2,100 tonnes represents 81% of the Total yearly gold production in the entire world (ie 2600 tonnes). Incredible but true, China must buy an entire year’s production in all the world to increase its gold reserves from 1% to 5%.

But as I previously mentioned THIS IS NOT POSSIBLE WITHOUT CAUSING THE PRICE OF GOLD TO SKY-ROCKET.

What is absolutely certain is that China must and is diversifying its foreign reserves out of the US Dollar and into other major world currencies, including gold. It is also well very certain China has for sometime been secretly buying gold…and most certainly will continue to accumulate gold until is reaches its conservative target of 5% of its total foreign reserves. However, we need to remember China’s US dollar reserves will continue to mount DAILY as long as the US Trade Deficit is a reality. To be sure, the ONLY way for the US Trade Deficit to reverse is to sharply devaluate the greenback, which would propel the PRICE OF GOLD into orbit….that much faster.

Summation of the Monumental ramifications of China’s necessity to buy gold:

– China’s gold purchases will continue unabated for years to come, during which in my opinion the POG may reach US$1900 to US$2000/oz. this year

– Furthermore, a gold price rising to $3,500/oz in 18-24 months is well within the realm of possibility vis-à-vis China’s necessity to diversify foreign reserves, and the US Fed monetizing the massive issuance of US Treasuries to finance (ie QE3), and President Obama’s programmed $17 Trillion deficit during the next few years – with the objective of stimulating the U.S.A. out of a spiraling depression. In light of the above, gold between $1,900-$2,000 this year and $3,000 in 2013 are feasible and logical price goals. However, the speed of how fast the U.S. dollar declines will help determine how fast the gold price will ascend.

– Any respite in the rising price of gold is an opportunity to buy more before the price surges even faster and higher.

TO BE SURE the present secular bull market in gold is today in its early infant stages.

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