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There may be some
misunderstanding about the increase in Chinese gold reserves. The bulk of
that gold has come from purchases of their own domestic production, not
open-market purchases, so the impact on the price is indirect. But because China is the
largest gold producer in the world and it is retaining the bulk of its
production for reserve diversification, the impact is significant.
Consider, for
example, if South Africa
had been able to retain the bulk of its production when it was the prime
producer. Today it would be one of the richest countries in the world. As
Pierre Lassonde reminded us in the recent past,
there haven't been any large gold discoveries in many years. That puts China in a
very strong position with respect to the gold market, and from what we can
gather, it has decided to play that card.
Because of its
strong exports, China
doesn't need to export gold as South Africa did to sustain and
strengthen its economy. China
will be able to build gold reserves and make the yuan
stronger -- its financial muscle being the weight of its gold holdings, which
are likely to grow year to year and perhaps even accelerate as new fields are
brought into production. In addition, as the price of gold rises
so too will the value of China's
gold reserve. The currency advantage is the one thing the press reports so
far have overlooked, and as time passes, that advantage may be the most
important.
Now I realize that
all of this is not quite so glamorous as China buying
up every loose official-sector ounce, but at the same time what I have here
will have a greater long-term impact than any purchase of a one-off official
sector sale. True to its reputation for patience and steady progress toward
its long-term goals, China
has taken the golden path -- and now China wants the world to know
about it.
Last April in my
"Golden Gut Check" essay (http://www.usagold.com/amk/abcs-goldengutcheck.html) I mentioned the importance of China keeping
its gold production home. At the time the market overlooked it as a major
factor in pricing. Now, with publication of a gold reserve gain that occurred
over a five-year period, hard numbers are available. China seems
to want to make a point and the general market seems to have recognized its
importance. (The China
gold story made the front page of the Financial Times' weekend edition.)
Taking this
discussion a step further (and this might be worth another essay by itself),
at some point the Chinese might be very interested in a gold revaluation that
compensates it for its dollar stockpile, and others might be willing to go
along with this as the least offensive means to bringing balance to the
international economic equation. That gold revaluation could occur informally
with the market moving steadily higher over the years in a free-market
dynamic, or it could occur formally as a return to an international gold
standard. I hardly need to explain what they would mean to gold owners the
world over.
While we ponder the
growth of the Chinese gold reserve, let's not set aside the other major gold
story from China
during the past week. China's
request that the International Monetary Fund sell the entirety of its
3,217-tonne reserve coincides with China's
announcement on its gold reserves and is intended to deliver a message to the
financial markets: China
sees gold as an important part of the international monetary scheme -- a
scheme that may evolve into a system. If China were to purchase the full
3,217 tonnes at $1,000 per ounce, the price would be $103 billion. With China's foreign exchange reserves at $1.95
trillion, the price of all the IMF gold would be a paltry 5.25 percent of China's total reserves, leaving China with
$1,847 billion in total reserves apart from gold.
China has turned the bludgeon of IMF gold sales into a
wet noodle.
(And, by the way, China would then become the largest holder of
gold in the world after the United
States and the European Union.)
The message
contained in China's
actions of the past week is unmistakable. China knows that gold is making a
comeback almost as a force of nature.
Gold's return to the
center of value will be dictated by history and
events with or without the help of governments. I believe China is
preparing for that day, and from its perspective apparently it cannot prepare
fast enough. The first step toward stability for both individuals and nation
states is a step in the direction of gold, and China has taken it.
Talk about following
in the footsteps of giants (with a nod to my old friend, Another, who posted
his thoughts at the USAGold.com Forum, such as these from 1998:
* * *
Saturday, January
10, 1998
ANOTHER (THOUGHTS!)
Someone once said,
"No one wants gold -- that's why its U.S. dollar price keeps
falling." Many thinking people laugh at such foolish chatter. They know
that the price of gold is dropping precisely because TOO MANY people are
buying it.
Think now: If you
are a person of great wealth is it not better for you to acquire gold over
years at better prices? If you are one of small wealth, can you not follow in
the footsteps of giants? It is an easy path to follow! An experienced guide
is not needed for this trail, Look around you and see. The real money is
selling ALL FORMS of paper gold and buying physical. Why? Because any form of
paper gold is loosing value much, much faster than metal. Some paper will
disappear altogether in a fire of epic proportions.
The massive trading
continues at the LBMA but something is now missing: The central banks are no
longer lending. They will not anymore. We have reached production costs. Oil
will have nothing of "gold paper" if gold must stay in the ground. And
a central bank values the wishes of oil far above return of its leased gold!
Hear me now: If gold
tries to go lower than US$$280 the Bank for International Settlements will
buy it OUTRIGHT in the OPEN for all to see. They must. They will. I know. For
no currency system could stand if oil were to bid for gold.
Oil has kept
"the deal" as the central banks sold paper gold to lower gold's
price. All is fair. Asia will bid for gold
not as in the past. They now know that the free flow of oil has more value
than the Pacific economy. But the price that was paid may be more than the
world currency system can endure.
The U.S. dollar has
risen on a flight of fear. That will now end as the LBMA shorts are given to
the wolves. If this fire burns too hot, gold will turn and its trading will
be halted. The price of oil will explode as gold becomes the world oil
currency. Even now oil has locked the IMF's gold. Asia
will bid against them no more. We come to extreme times.
Risk not your wealth
in paper. We enter a period of truth.
Michael J. Kosares
USAGold - Centennial Precious Metals, Inc.
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