In august 2013 I published a translation from an article written by a Chinese gold commentator called Zhang Jie. In the article Zhang described how not only the US but also other western countries have been involved in manipulating the price of gold to control the international monetary system for decades. I suggest to read the full article – here are a few snippets:
…Gold leasing is an important innovation in the gold settlement system. Through continuous gold leasing the gold in the market can be circulated and produce derivatives, creating more and more paper gold. This is very significant for the United States. Gold leasing is a major tool for the Federal Reserve and other central banks in the West to secretly control and regulate the gold market, creating gold credit derivatives and global credit conflict.
…The purpose of gold leasing is not just to receive a rent, but it also provides the ability to short-sell gold, which allows central banks to interfere in the currency market.
…If the Fed’s large gold reserves are used in gold leasing, there will be a serious problem. Germany therefore will threaten the Fed’s dominant position by demanding their gold back; the Fed subsequently needs to withdraw the leased gold and thus could destabilize the market. This is a new credit game of international capital.
…The Fed probably has agendas aimed at preventing Germany to inspect its gold or to ship it back to Germany.
I recently came across another article by Zhang that I also found worth sharing. First you can read the article, then I will provide some comment. This article is dated 16-04-2013, but it must be a repost as the data in the text shows it had to be written Jan/Feb 2013. Everything in between [brackets] is written by Koos Jansen.
Translated By Soh Tiong Hum!
Zhang Jie: China’s Road To Secret Accumulation
2013-04-16 Author: Zhang Jie
Core hint: China may gradually acquire gold on the international gold market through non-central bank financial entities, the newly acquired gold shipped back to China to be converted into central bank gold reserves. Credit in various forms including gold reserves will support China’s Renminbi and its internationalization.
Unless military confrontation or economic sanctions take place between China and US, there should be little question about the safety of China’s gold reserves stored at the US Federal Reserve. The question of China’s gold is not its safety but rather to possess the ability to use it for market intervention, and to boost creditworthiness of the Renminbi.
Difficult To Bring Back Gold
Risk of losing China’s gold stored at the US Federal Reserve can be temporarily set aside because in comparison to China’s foreign exchange reserves, the risk to China’s foreign exchange reserves is larger than the risk of gold deposited at the Federal Reserve! Regardless of buying sovereign debt or depositing in the US financial system, there is risk of a mass default. A mass failure to fulfill obligation by Western countries should no longer be called a default but a crisis. Cash deposited inside the financial system has even more danger. Western banks can go bankrupt, even large corporations like Lehman. Therefore risk has to be looked at in relative terms, not just absolute ones. The gold question should be looked at from the angle of the global currency system. Whether gold should be stored in China has to be considered for the level of creditworthiness.
The PBOC operates on a ‘pool’ concept, which also needs gold. Considering the global credit game, it is highly necessary for China to develop her own gold reserves and must do so with a better strategy than Germany.
The US has already demonized China’s rise so if China were to ask to bring back her gold, it would surely lead to a tremendous confrontation. When China first shipped her gold to the US, it was meant for reform, opening up and removing US economic sanctions. To ask for the gold back now would be a political signal. China can wait to look at Germany’s outcome before considering to repatriate it’s own gold from the Federal Reserve. China does not yet have to pull her chestnuts out of the fire. If China were to make a fuzz about their gold, Western countries will point their fingers at China, but not to Germany because of their close relation.
Accumulating Gold To Convert FX Reserves
China can use its increasing foreign exchange reserves to buy gold continuously. When the US and European central banks are continuously leasing and short selling gold, China can buy this gold and take possession, adding them to domestic reserves.
It’s best to let domestic financial entities acquire gold rather than the PBOC, to create multiple positions in the domestic gold futures market, to create the impression of forced buying by private hands so as to shut off international opinion. Purchased gold is withdrawn from the futures market, stored with reserves held in core financial entities then moved to the PBOC for domestic safekeeping. Just like Western central banks use gold leasing and short sell gold, China also needs to employ deception to secretly accumulate gold in a timely manner.
It is a good time for China to use surplus foreign exchange reserves to purchase gold when central banks around the world are secretly leasing gold and short selling gold to prop up currency printing. During the 10 years after gold leasing was born [early eighties] the world sold gold short, while during the gold bull market short sellers in the gold leasing business covered their shorts. International gold price fluctuations after 2008 was when gold short selling commenced again, especially at the time when gold fell from USD 1900 and US and Western countries were running endless quantitative easing. With the gold price is running contrary to quantitative easing, it is highly probable that Western central banks or major institutions were short selling gold. With China acquiring gold till a currency crisis erupts and short sellers need to cover their position, international gold price will certainly rally, possibly resembling eighties like fluctuations. It is therefore a tremendous opportunity for China to buy gold now to hedge against risk from a global currency crisis.
China in possession of large amounts of gold, China has secretly accumulated more gold, is a way to fight developed countries that are depreciating their currencies with quantitative easing; China’s gold accumulation gives them caution about short selling gold and currency printing. This is the most effective means to protect China’s foreign exchange reserve wealth from the threat of the Western financial hegemony.
China’s GDP and foreign exchange reserves already exceed Germany’s. Therefore China must possess effective control over gold volume not less than Germany’s gold reserves. At the current price of USD 1700 per ounce, one ton of gold is worth USD 50 million. When gold rises to USD 2500 per ounce, one ton of gold is worth USD 75 million. If China brings in 10,000 tons, foreign reserve spending is merely USD 800 billion but this volume is roughly 30% of gold in global circulation [he means global official reserves!] and is going to be pole position in global markets. Spending such a small expense to swallow such a massive gold position is only possible when the world is short selling. Otherwise price will go sky-high when you buy 10,000 tons! Buying US government debt with China’s current foreign exchange reserves at USD 3.3 trillion yields less than the 0.25% Fed Funds Rate. With this very low yield, buying gold is a good deal.
More than 80% of the PBOC’s currency in circulation is foreign exchange. Depreciation by foreign currencies such as US Dollar forces Renminbi to lose its purchasing power and increases turbulence. This was the reason why China imported inflation years ago. If China buys gold in large amount now, she can choose to support the value of Renminbi with gold in future. Purchased gold will support Renminbi creditworthiness. At the moment, Renminbi’s creditworthiness is supported by the central bank’s foreign exchange reserves but the creditworthiness of foreign exchange in its possession is a function of the issuing country, not China. Supporting China’s creditworthiness is not just about buying gold but also buying China’s sovereign debt, government debt, core industry debt, Chinese real estate, Chinese rare earth, tungsten, antimony and so on. However, besides foreign exchange gold and precious metals are the most appropriate for use overseas to support Renminbi’s export and international policy.
The foreign exchange standard has more problems than a gold standard. The Renminbi wants to be internationalized and China wants to be wealthy and strong. If the Renminbi issuance remains linked to the US Dollar, then the Renminbi will just resemble many so-called international currencies, becoming merely a proxy of the US Dollar, unable to match the creditworthiness of the US Dollar. Internationalization of a pegged-Renminbi is a make-believe internationalization, just like the Hong Kong Dollar, freely changeable but confined to linked rates.
Though he’s not a politician Zhang provides us with interesting insights about China’s monetary policy.
Zhang writes; “there should be little question about the safety of China’s gold reserves stored at the US Federal Reserve” (I asked my interpreter if this is really what he wrote, he really did..), while he clearly states these reserves held by the Fed are leased out and are thus NOT save. A few sentences later he writes; “Risk of losing China’s gold stored at the US Federal Reserve…”. In fact the rest of the article is about the importance of the PBOC holding official gold reserves in the mainland to strengthen the Renminbi. I don’t understand why he wrote the gold is safe in the US in the beginning.
“When China first shipped her gold to the US, it was meant for reform, opening up and removing US economic sanctions.” This underlines the dirty game the US is playing. It demands countries to store a part of their official gold reserves at the New York Federal Reserve so ultimately only the US controls the global currency market. According to this article, written in January 2013 by Liu Zhongbo from Agricultural Bank of China, at least 600 tons of Chinese official reserves are stored at the Fed.
“It’s best to let domestic financial entities acquire gold rather than the PBOC, to create multiple positions in the domestic gold futures market, to create the impression of forced buying by private hands so as to shut off international opinion. Purchased gold is withdrawn from the futures market, stored with reserves held in core financial entities then moved to the PBOC for domestic safekeeping.” I fully understand the PBOC is buying gold through proxies, however all my sources in the mainland ensure me the PBOC would never (indirectly) buy at the Shanghai Gold Exchange, which is the only domestic futures/deferred market where significant amounts of gold are being withdrawn from the vaults. On the Shanghai Futures Exchange withdrawals are neglectable. Maybe Zhang’s approach is wrong here.
The PBOC wants to diversify it’s FX reserves (USD) in gold, all gold on the SGE is quoted in RMB. It would make more sense for the PBOC to buy gold abroad in exchange for dollars, this would also circumvent SGE premiums. On the Chinese Foreign Exchange Reserves of the People’s Republic of China wikipedia page (not on the English page) it states:
The FX reserves of the Chinese mainland are State-owned assets and managed by SAFE and the PBOC. The real operations are done by the Bank of China.
The Bank Of China is a commercial state-owned bank and LBMA member, just like ICBC. It’s more likely the PBOC would make purchases through these channels.