The other day Zero Hedge posted an image from a quarterly financial report from the Chinese central bank, the PBOC. When I first looked at it I thought for a minute the PBOC had announced a raise in their official gold holdings. Then I woke up and realized their gold holdings are disclosed in the second row from below, still stuck at 33.89 million ounces. I asked my friend in the mainland to translate the headers to get a better view on this summary. He was so kind to do so.
We can see Chinese FX reserves expressed in US dollars (which is still the most commonly used reserve currency and unit of account worldwide) having a total value of $3,821,315,000,000 (or $3.8 trillion) at the end of December. At least 34 % of these assets are denominated in US dollars in the form of US treasuries ($1.3 trillion). Only 1 % is held in physical gold according to the PBOC; 33.89 million ounces (1054 tons) was worth $41,5 billion in December. Let’s compare these numbers with the a few other countries. From The World Gold Council:
The Need For China To Buy Gold
China is in the top ten in terms of gold holdings, but only holds a fraction of gold relative to its total FX reserves.
The bulk of China’s FX reserves are extremely vulnerable for a devaluation of the US dollar. At the same time a devaluation of the US dollar is imminent, as Yu Yongding, a prominent Chinese economist and former member of the monetary policy committee of the People’s Bank of China, has expressed in numerous presentations. This is why China has a strong incentive to hedge against the USD by increasing their official gold holdings. From Yu Yongding at the LBMA conference 2012:
..Before taking over the Presidency of the Fed, Bernanke was very open in talking about the possibility of using inflation to solve the debt problem. He gained the very apt nickname ‘Helicopter Ben’, and I think he will rule out this option, but of course he will not say so openly.
..To push down the value of the dollar is another very important objective of QE, even though Bernanke refused to admit that this is the policy, I think Greenspan is more honest, because he is no longer the governor.
Essentially, the policy of QE is to shift the debt burden away from borrowers at the expense of creditors and I think this is basically the situation that China is facing.
A big problem for China has been buying large quantities of physical gold without increasing the price. For this reason China’s strategy has always been to be as secretive as possible about its gold purchases. They don’t disclose their gold import numbers, nor any interim changes in official gold holdings. They hide their dire hunger for the yellow metal to simply bargain a better price. But sometimes their craving to buy gold (without affecting the market) slips through the media:
China should increase its gold reserves appropriately, and China must take every chance to buy, especially when gold prices fall.
China should now rapidly increase its gold reserves, without pushing up prices of the precious metal excessively.
It’s especially true that as global gold prices make new highs, increasing gold reserves also become more difficult.
So China’s main objective is to buy as much gold for as little dollars. The main objective of the US is to devalue the dollar.
A Summary Of Potentially Coherent Facts
- The US debt problem has created the necessity to devalue the dollar in order to shrink their debt (and boost export).
- China holds at least $1.3 trillion in FX exchange which will be wiped out by a US dollar devaluation.
- The US and China have a strong trade relationship; Both benefit from China exporting cheap goods to the US.
- The US and China share a mutual interest in holding the value of the dollar in check for trading.
Can it be these two mighty countries agreed in early 2013 to support the value of the dollar for the time being, while heavily suppressing the price of gold in the paper markets to allow China to accumulate as much of the yellow metal as needed? This would surely provide the best outcome for both after what inevitably will happen: a devaluation of the US dollar and a revaluation of gold.