Wednesday, January 11, 2012

China takes advantage of US Fed stupidity

While the US Fed was using negative lease rates to push down the price of gold, China may have been taking advantage of the temporary low price to diversify their FX holdings. After all, the Chinese know gold is money even if Ben Bernanke thinks it isn't.

Zero Hedge reports

There is informed speculation that commercial Chinese banks may have taken advantage of the recent price dip to build stocks of coins and bars and accumulate bullion.
China's demand for physical gold bullion has rocketed past India with the country now overtaking India in the third quarter as the largest gold jewelry market according to the World Gold Council.
There is also informed speculation that some of the buying was from the People's Bank of China with one analyst telling Bloomberg that “there is always the possibility that some purchases were made by the central bank.”
As we've stated in the past, the PBOC is gradually diversifying their huge FX reserves and likely will announce upward revision of total gold reserves again in the coming months. Whether official buying is responsible for the huge surge in gold imports from Hong Kong is more difficult to ascertain The Chinese Central Bank does not release their figures on gold purchases.

 Keep in mind China has had massive trade surpluses with the US for nearly twenty years. Having seen the value of the US dollar decline by 33% since 2000, they now have had enough. At some point, it simply makes no sense for China to continue to peg the Yuan/ Reminmbi  to the US dollar. There is a point where the developed world's race to devalue currencies against each other will equalize (or at least relatively) and China's current model of keeping its own currency relatively low to boost exports will no longer work as effectively. At some point China will be faced with a choice: let its currency float against other currencies and trade freely or devise a new currency regime that will make the Yuan a competing reserve currency around the world with the US Dollar. I believe it will be the later and it will develop some type of gold backed currency in some form. This will, of course, require China to massively increase its gold holdings. CNBC's updated gold holdings by country shows China with roughly the tenth largest with 1,162 tons of gold, but that's behind France, Italy, Germany and the US which holds 8,965 tons (assuming Fort Knox is still full!).

So clearly China has a ways to go before it comes anywhere near the US but that doesn't necessarily mean they have to equal the US to have more credibility. Even a partially backed currency may seem like a more stable alternative to the Dollar or Euro, especially if we see more quantitative easing this year. China of course is playing a long game and is using the Fed's short term foolishness to their long term advantage.  

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