Monday, December 15, 2014

Why Would China Announce Their Gold Reserves?

Most of the international financial press was waiting on a Chinese announcement about their gold holdings. I fully expected it as well since it has been five years since the last announcement. It has not happened. This is during a year where China has not increased their Treasury holdings. This is during a year where more financial warfare talk has happened, and Russia has been open about gold purchases. There have been multiple global conferences with big economic talk and symbolic picture arrangement. Why would China stay mum? China staying silent actually helps their accumulation of gold and set up for the final reveal.

China has financial problems just like everyone else. They have some advantages. They also are a player in the current set up that shifts currency their way. The Chinese have been on a buying spree, securing resource producers, building the "string of pearls" concept and buying gold and oil. The entire "Money to Africa" play is about gobbling up resources and doing so that does not come with the progressive belief buffet from the US State Department. Their UST holdings have been flat for over a year. Shanghai keeps importing gold by roughly one hundred of tonnes a month, but unless there is a private intermediary, those are private consumption numbers. The numbers are giant, and if you include that China does not export its own gold production, they, along with Russia and some gold purchasers, are sucking in nearly all available gold. The FED and US banking cartel wants gold cheap to keep the peasants sedate and kill any alternative to the dollar. China wants gold cheap to buy more.

This is why they have been keeping quiet about their gold total. When they announced their gold holdings in spring of 2009, that combined with QE and the FED balance sheet expansion, sparked a rise in gold from $900+/- to $1200 by the fall. This was just after announcing their gold holdings crossed 1000 tonnes. Some writers question if 1000 was even the true number then. Chinese officials have mentioned 8500 tonnes as a target. If that is the case, why would they want to announce a massive jump from 1000 tonnes to say 2000, 3000 or even 4000? That announcement could set off another jump in the gold price, making all future purchases more expensive. This also hurts them as Chinese firms have been buying stakes in gold producers. A lower gold price depresses their value, and it also forces some gold producers to either sell off more marginal mines or seek capital. The Chinese can provide capital. Worst case scenario would be a gold reserve holdings announcement setting into motion a dollar crisis before they were ready.

The Chinese also want a slower bleed out of the US. A slower bleed that allows use of the current system (which favors China) to remain in place gives them more time to accumulate gold, set up Shanghai and position themselves better for whatever shake up and new order is created. What happens if the current order is dismantled, and the Chinese declare they have 6000 or even 10,000 tonnes of gold? America would then be forced to audit their gold holdings to prove they are an equal correct? Global embarrassment time. Most government numbers have an element to phony to them, and PRC and USG are both maestros of the art. It makes sense to our Western minds to announce, show some cards and play on. The problem is the Chinese are tackling problems differently. The South China Sea island dispute melted away when the Chinese decided to build their own island. There can be no dispute if they build the island. That must have been on page 104 of Sun-Tzu's "The Art of War". As far as gold, China has no reason to announce their holdings. They just have to accumulate, wait and watch.

10 comments:

peterike said...

This whole subject area -- the machinations of banks, particularly national banks -- is fascinating, but it's also a topic one can never quite seem to get to the bottom of. Everything ultimately dissolves into a murk of confusion, deliberate misdirection, obfuscation and lies. Sometimes I think they're all in cahoots, and other times that there really are enemy banking armies on the field, and that the Banks of the West are getting rolled big time because their time horizons are next quarter's bonus checks while the Chinese and Russians are thinking decades out.

Portlander said...

Among the politicians and bureaucrats in the US the problem is hubris leading to an over-confidence that they can just keep playing the same old tricks and get the same old results.

Among the bankers and executives in the US the problem is hubris leading to an over-confidence that the US will always be the only game on the planet for any entrepreneurs with a new idea and looking to get ahead. And even if that day does end, they are raking it in now, so as Chuck Prince at Citibank (I think it was) said circa 2007, when the music is playing you have to dance, and the music is playing.

The problem with a currency crisis is that it's essentially a national bankruptcy. And we all know how bankruptcy goes… slowly at first, then all at once.

I think the Treasury Dept acting like wanna-be CIA spooks is hammering Russia's currency as an act of strong-arm diplomacy. I don't know the numbers, but I suspect Russia's economy and that part of the FX market is small enough they can get away with it.

China's, on the other hand, ain't. So beating up on Russia as a show of force runs the risk of pushing everyone smaller than Russia that's been having misgivings with US policy to start thinking all the more about Plan B with China.

Portlander said...

Just looked up a few of Russia's economic stats at tradingecomics.com. I don't know anything about them except they were the first hit for my search.

Current Account is a surplus and has been every quarter of every year since 2000.

Ordinarily, I'd say it might be going negative with the big drop in oil we've had this fall and winter, but since the ruble has cratered even more than oil, it might actually stay positive. Hey, I've seen where Ireland still exported potatoes in the middle of the blight. On the other hand, it's as reported by the Russian Central Bank, so maybe they lie about it? I'd think it's a lot harder to have a currency crisis when the CA is positive.

Similarly, the Russian Gov budget was in surplus 2-10% of GDP for 2000-2009. Slammed to -8% in 2010, -4% in 2011, and virtually balanced for 2012 & 2013. I don't know what 2014 looks like. I'd bet it's within 1% of balanced.

Total debt to GDP is 13.5%. That's better than any EU nation I'm aware of and certainly better than Japan or the US. Germany, usually the best of the worst is at 77%.

Also, Russia is smallest of the big boys. GDP is 2.1T, compared to 2.5T for UK, 2.7T for France, 3.6T for Germany, and 4.9T for Japan. Of course, the US dwarfs everyone else at 17T. China is our only comp, and it broke into double digits for the first time this year at 10T.

In short, this confirms my opinion that the ruble is a manufactured crisis being instigated by the US Treas Dept, and very probably in concert with other central banks.

I'm not a high-roller and have no idea how to invest as such, but I'd think 5 yr Russian paper is an incredible investment.

Anonymous said...

@Portlander

There's little doubt Russia is going to have surplus budget this year or the next. Problem with roubles inflation is different - it's importing 50% consumption goods and 90% industrial devices it needs, and they are importing most of that from none other than EU. Now their price is going to rise a lot and I highly doubt Russia's government will be able to rise salaries and pensions enough so people don't feel restricted.

Other problem is that interest rates have been risen to 17% by central bank, so small business is going to borrow money at what interest rates from private banks? 25%? 30%? At least one bank has already stopped giving loans to people. It might be the only one, but still, it speaks for itself.

Surplus budget is fine as long as you are investing your money smartly, meanwhile Russia was investing all it's oil money not to other sectors, but to higher salaries, pensions and gifts to its people, therefore they have no other ways to collect money to budget without high oil prices. I think you really overestimate their ability to think far into the future.

Yet I agree that now is the time to buy Russia's rouble, albeit it's always time to buy something when it's price reaches historical lows.

eah said...

Again the problem with China -- and Russia, for that matter -- is that no one would ever see them as a safe haven. China is basically a communist dictatorship, and, well, Russia is run by Putin and his mob. (Which is not to say that the West has dealt entirely fairly and reasonably with Russia.) And the latest decline of the ruble will only make people think 3x instead of 2x about financial dealings with Russia.

The political and military hegemony of the US -- which will last for some time to come -- makes the US the only safe haven.

Portlander said...

I agree times are going to be tough for Russians, but I don't see how one gets a currency crisis out of Russia's situation without a nudge from some large third party to get the ball rolling.

Do they sell their oil in rubles or some other foreign currency? Pretty sure it's the latter, so if they are selling oil in dollars and euros, and buying consumer goods and industrial equipment in dollars and euros, it should be a wash. Except for, as you say, the workers getting paid in rubles.

What Putin has done is make a lot of noise about breaking out of the dollar hegemony. For instance, pricing oil in gold and making an RMB deal with China. So, what this feels like is the old conspiracy theory that once someone starts making noise about breaking from the petro-dollar (ie. Sadam & Gadaffi) it's gloves off time. It does make one wonder.

SoBL, what do you think?

Portlander said...

I think a $17T economy makes the US the only safe haven.

We're the 800lb gorilla and half of everything that gets made in the world goes through us.

Going off the dollar for a nation is akin to going off the grid for a large family. It can be done, but it ain't easy and there's the second generation you have to think about as well. How are your sons and daughters going to find work and get married if their skill-set and social circle is more or less that of a 1910's yeoman farmer?

Anonymous said...

@Portlander

Problem is it's not Russia's government that is buying consumer goods and industrial devices (well, ok, some factories, don't know exact share, are owned by government, but a lot are not), it's their companies. So, if their income consists from reselling consumer goods (think supermarkets and shops) or selling technological devices they make using industrial equipment they bought to their own market (Russia isn't exporting these things mostly), they are earning rubles, which they then have to convert to euros in order to buy more goods from EU. Not a great future prospect if you own a company.

I don't think it's because of dollar hegemony, more likely it's battle for Ukraine. By ruining Russia's economy EU and USA try to force Russia to cease it's supports to Eastern Ukraine's rebels (technically they are not separatists, because they have expressed their desire on numerous occasions to join Russia) and let Ukraine (market of 44 million people) join EU - big win for EU+USA.

Portlander said...

The things you describe are all true, but what I'm saying is one doesn't get a currency crisis unless the govt backing the currency first has its own crisis.

To my knowledge this has always been from a developing country getting its credit yanked from a build-up of unsustainable debt financing.

This time around Russia does not have a huge debt overhang, and yet their currency is in a crisis.

Maybe Russian banks have made a bunch of dodgy loans and they are having their own credit bubble pop akin to our housing bubble in '07-08. Or maybe they were pushed by someone with enough chips to go into an otherwise thin market and knock over a few dominoes.

Jamie NZ said...

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Call your mates!!!