China still has $2 trillion dollars of foreign exchange reserves and is continuously preparing for the coming crisis on all possible levels.
– Gold shines as China dumps US dollar
There are still people out there that say that there is no bubble in US Treasuries. Just wait!
The ‘Obamanomics’ – spend America into oblivion – bond bubble will destroy the US dollar. The Greatest Depression is already here.
A report suggests that the Chinese government is pushing the general public into buying gold and silver bullion, which could have a dramatic effect on the markets.
LONDON – We are indebted again to Paul Mylchreest’s Thunder Road Report for news that will bring big smiles to gold and silver investors everywhere. Apparently China is pushing the idea of buying gold and silver for investment purposes to the general population in the way that Western television sells soap powder. If 1.3 billion Chinese citizens start buying gold and silver, even in tiny quantities, imagine what that will do to the market!
The report notes that China’s Central Television, the main state-owned television company, has run a news programme letting the public know how easy it is to buy precious metals as an investment. On silver investment the announcer is quoted as saying ” China has introduced its first ever investment opportunity for silver bullion. The bars are available in 500g, 1kg, 2kg and 5kg with a purity of 99.9%. Figures show that gold was fifty times more expensive than silver in 2007, but now that figure has reached over seventy times. Analysts say that silver has been undervalued in recent years. They add that the metal is the right investment for individual investors and could be a good way to cash in.”
What appears to have happened in China is a total relaxation of strictures on holding precious metals by the individual with the government pushing gold and silver as an investment option, seemingly at every opportunity. This is a far cry from the situation only a few years ago where the distribution of gold and silver was strictly controlled. Now, the Thunder Road Report notes that every bank will sell gold and silver bullion bars in four different sizes to individuals and gold related investments are said to be soaring in popularity.
Around a year ago, Leyshon Resources managing director, Paul Atherley, in an investor presentation in London – and no doubt delivered elsewhere in the world too – commented that some employees at the company’s gold mining project in northern China would, on pay day, go to the local bank and buy a small gold bar as an investment and wealth protector. To an extent we put this down at the time to mining company hype – but this seems to be exactly the same phenomenon noted by Thunder Road. The Chinese are being converted from being the lowest per capita gold consumers in the world to a nation of small precious metals investors. Now, by next year, Chinese consumption of gold is likely to exceed that of India, which has been for years the world’s biggest gold market. And one suspects that the potential for gold purchasing by individuals is only in its earliest stages. As more and more Chinese move into the cities and individual wealth grows, this trend is only likely to accelerate.
Paul ends the piece on Chinese gold and silver potential with the following comment: “Simply put, the Chinese government is trying to trigger a national gold craze…and it’s working. The Chinese public now has gold trading platforms on steroids…. …Also, for the first time in history, Chinese investors can even trade gold abroad (in London) with the swipe of a ‘Lucky Gold’ card. I can’t even get Bank of America to open a foreign currency account.”
This may be an overstatement of the case from a precious metals bull – or it may not! Certainly if China is indeed pushing the public to buy gold then there may well be a hidden agenda here. It’s unlikely they are doing it and will suddenly pull the rug out from under millions of investors. A cynic (or a raging gold bull) would suggest that this will precede a move to switch a good proportion of the country’s reserves into gold which would have a huge effect on the global gold price and could prove disastrous for the dollar. Maybe it’s not in China’s interests to drive the dollar down too much until it has managed to divest itself of the huge dollar overhang (see the article on Chinese Sovereign Wealth Funds we published yesterday – Chinese sovereign wealth fund dumping dollars for strategic investments like gold ). The country may well already be, of course, surreptitiously building its gold reserves without reporting the build-up.
If the Chinese are indeed beginning to buy gold and silver as the quoted report suggests then this has to be a strong signal that prices are going to rise, and perhaps rise dramatically, in the relatively near future. We await comment from other China watchers for confirmation of the gold and silver buying spree, but with global gold production at best flat and probably in decline, even a small increase in Chinese buying could have a substantial impact on gold and silver prices.
Author: Lawrence Williams
Posted: Thursday , 03 Sep 2009
Cheap dollars are sowing the seeds of the next world crisis
After years of selling cheap goods to debt-fuelled Western consumers, China now has $2 trillion dollars of foreign exchange reserves. That’s 2,000 billion – a reserve haul no less 25 times bigger than that of the UK.
In a world of systemic instability, reserves mean power. Reserves mean you can defend your currency, stabilise your banking system and boost your economy without resorting to yet more borrowing – or, worse still, the printing press.
More than half of China’s reserves are denominated in dollars. So when the dollar falls, China loses serious money. When you’re talking about a dollar-reserve number involving 12 zeros, even a modest weakening of the greenback sees China’s wealth takes a mighty hit.
In recent years, America has run massive budget and trade deficits, both of which put downward pressure on the dollar – so devaluing China’s reserves. Beijing has remained tight-lipped, worried less about diplomatic niceties than the financial implications of voicing its concerns. If the markets thought China would buy less dollar-denominated debt going forward, the US currency would weaken further, compounding Beijing’s wealth-loss.
American leaders have relied on this Catch-22 for some time, guffawing that China is in so deep it has no choice but to carry on “sucking-up” US debt. But Beijing’s Communist hierarchy is now so worried about America’s wildly expansionary monetary policy that it is speaking out, despite the damage that does to the value of China’s reserves.
Last weekend, Cheng Siwei, a leading Chinese policy maker, said that his country’s leaders were “dismayed” by America’s recourse to quantitative easing. “If they keep printing money to buy bonds, it will lead to inflation,” he said. “So we’ll diversify incremental reserves into euros, yen and other currencies”.
This is hugely significant. China is now more worried about America inflating away its debts than about those debts being exposed to currency risk. Economists at Western banks making money from QE still say deflation is more likely than inflation. As this column has long argued, they are talking self-serving tosh.
The entire non-Western world rightly sees serious inflationary pressures down the track in the US, UK and other nations where political cowardice has resulted in irresponsible money printing.
Following Mr Cheng’s comments, the dollar fell throughout last week, hitting a 12-month low against the euro. As the dollar’s “safe haven” status was questioned, gold surged above $1,000 an ounce to an 18-month high.
The US currency could well keep falling. America’s trade deficit grew in July at the fastest rate in almost a decade. Imports exceeded exports by $32bn last month – a gap 16pc wider than the month before. One reason was that as oil prices strengthened, so did the cost of US crude imports.
Oil touched $72 a barrel last week. If the greenback weakens further, prices will keep going up. That’s because crude is priced in dollars and global investors will increasingly use commodities as an anti-inflation hedge.
These forces could combine to send the dollar into freefall. US inflation would then soar and interest rates would have to be jacked up. Even if a fast-collapsing dollar is avoided, Fed rates may have to rise quickly if China is serious about dollar-divesting and the US has to sell its debt elsewhere. Under both scenarios, the world’s largest economy could get caught in the stagflation trap – recession and high inflation.
Beijing doesn’t want the US to stagnate. China has too much to lose. But even if China and US work together to avoid a meltdown, the currency markets could provide one anyway.
The dollar is now being used as a “carry” currency. Traders are using low Fed rates to take out cheap dollar loans, then converting the money into currencies generating higher yields.
“Carrying” credit in this way is currently the source of huge gains. No one knows the true scale, but the world has, of course, been flooded with cheap dollars.
This presents serious systemic danger. A dollar weighed down by Chinese divestment, then suppressed further by carry-trading, could easily spring back. Those who had borrowed in dollars would owe more, while their dollar-funded investments would be worth less. This “unwinding” could send financial shock around the globe.
This is what happened in 1998, when yen carry-trades went wrong, causing the collapse of Long-Term Capital Management and sparking a global slowdown.
So even if the Western world manages to fix its banking system, the Fed’s money printing could well be stoking up the next financial crisis. The dollar carry-trade. You heard it here first.
Liam Halligan is chief economist at Prosperity Capital Management
By Liam Halligan
Published: 6:05PM BST 12 Sep 2009
Source: The Telegraph