China’s Master Gold Plan, Restated

This post China’s Master Gold Plan, Restated appeared first on Daily Reckoning.

Query: How much gold does it take to get international prestige while not ticking off the powers that be?

1,658 tons, apparently. At least officially…

But before we explain further, a look at the yellow metal. Gold’s down $11, at $1,132, near its November 2009 lows. Inflation numbers, as measured by CPI, printed this morning and met surveyed economists’ expectations. Maybe that’s why.

It could also be because of the gravitas Janet Yellen’s showed yesterday while telling Congress rates would increase this year. Or it could be something entirely else…

Either way, “there’s a difference,” as Addison explained in a NPR interview years ago, when gold was still rallying, “between being a gold bug and understanding the impact of Federal Reserve policy on the U.S. dollar. Gold bugs are overjoyed to be riding the gold price all the way to $2,000, and they should be. But you can count on it they’ll ride the price all the way back down to $1,000.”

Take your pick of the reason gold’s down today and then grumble or shrug depending on which characterization fits you best.

“Gold is the only real money,” Addison wrote on a different occasion, in one of The Daily Reckoning’s free reports, The 5 Best Ways to Invest in Gold, “and it’s value cannot be changed or controlled by government fiat.” That’s why “the ultimate dollar hedge investment will always be gold.”

“I find it funny that central bankers are always disparaging gold,” Jim Rickards told me separately on the Eurostar train from London to Paris last week, “yet they all hold gold.”

As he finished that thought, we daydreamed back to July 13, 2011. We were sitting in room 2128 of the Rayburn House Office Building, in Washington, D.C.

Congressman Ron Paul was questioning then-Fed chairman Ben Bernanke during a House Financial Services Committee hearing …

Dr. Paul: Do you think gold is money?

Ben Bernanke: No. It is a precious metal.

Dr. Paul: It’s not money?

Ben Bernanke: It’s a precious metal.

Dr. Paul: Even if it has been money for 6,000 years, somebody reversed that and eliminated that economic law?

Ben Bernanke: It’s an asset. Would you say Treasury bills are money? I don’t think they’re money either, but they’re a financial asset…

Dr. Paul: Why do central banks hold it?

Ben Bernanke: It’s… it’s is a form of reserves…

Dr. Paul: Why don’t they hold diamonds?

Ben Bernanke: It is tradition… a long-term tradition…

Dr. Paul: Some people still think it is money. I yield back. My time is up.

A moment for reflection…

“China increased its gold reserves 57%,” reports Bloomberg this morning, “overtaking Russia to become the country with the fifth-largest hoard in its first disclosure in six years.”

To bring you up to speed, since 2009, the People’s Bank of China has been mum on the country’s official gold reserves. That year it revealed its gold reserves as 1,054 tons, having risen 454 tons since its prior update in 2003. Since 2009, speculation and sleuthing have led to a range of predictions about China’s real gold hoard.

Meanwhile, on page 229 of The Death of Money, published in 2013, Mr. Rickards says, “the next update to the gold reserve figures can be expected in 2015” — a call made good this morning. According to the report, China’s official statement of reserves is now 1,658 tons.

“While the metal is no longer used to back paper money,” Bloomberg explains, “it’s a large part of central bank reserves in the U.S. and Europe. China may have stockpiled gold as part of its plan to diversify its foreign-exchange reserves.

Another explanation comes from a reader commenting on our website this morning, “The Golden Rule: Whoever has the gold makes the rules.” Mr. Rickards has diligently laid out the case for as much…

“Before I started talking about special drawing rights,” Jim told us recently, “people thought SDR stood for strawberry daiquiri on the rocks.”

Since then, the notions of the International Monetary Fund as proto world central bank… special drawing rights as the accepted world reserve currency… and currency wars seem to have become ubiquitous themes throughout the newsletter industry. Stay on top of other analysts’ forecasts, by all means, but remember you heard it from Jim first.

“The IMF officially demonetized gold in 1975,” Rickards wrote on April 14. “The U.S. ended the convertibility of gold in 1971. Gold disappeared ‘officially’ in stages in the mid-1970s. But the physical gold never went away.”

He continued to explain:

“Gold serves as political chips on the world’s financial stage. It doesn’t mean that you automatically have a gold standard, but that the gold you have will give you a voice among major national players sitting at the table.

“Here’s the problem: If you took the lid off of gold, ended the price manipulation and let gold find its level, China would be left in the dust. It wouldn’t have enough gold relative to the other countries, and because their economy’s growing faster and because the price of gold would be skyrocketing, they could never acquire it fast enough. They could never catch up. All the other countries would be on the bus, while the Chinese would be off.

“When you have this reset, and when everyone sits down around the table, China’s the second largest economy in the world. They have to be on the bus. That’s why the global effort has been to keep the lid on the price of gold through manipulation…

“The price is being suppressed until China gets the gold that they need. Once China gets the right amount of gold, then the cap on gold’s price can come off.”

While tapping this reckoning out, Jim called from the road. “China is feigning transparency with a ‘don’t rock the gold boat’ strategy,” he said in reaction to today’s announcement. “It’s a misrepresentation of the facts. They absolutely have more gold than they’re reporting.

“This behavior is consistent with the case we made in May,” he continued. “China is doing what it needs to do to join the SDR club, but nothing more. The gold reserves they reported are less than the IMF’s,” which, for reference, holds about 2,814 tons, “but enough to get noticed. The report today was also not enough to send the gold price higher, which suits China fine, since they’re still a buyer.”

Opinions and conjecture are bound to circulate in the coming hours. Now more than ever, it’s important to understand why Jim believes most gold bugs and bloggers are dead wrong about China’s gold reserves. That said, we’ve decided to republish Jim’s piece from May 18. Click here to read it in it’s entirety.


Peter Coyne
for The Daily Reckoning

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