Monumental ramifications of China's necessity to buy gold to diversity foreign reserves
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Recent news has been aired a number of times and from various sources in past months. This is testament to the validity and timeliness of the news. But no one has really delineated the monumental ramifications of China's necessity to buy gold to diversity foreign reserves. Consequently, I took a close look at the pertinent numbers. To appreciate my findings it is necessary to show the following basic data:
- China has well more than $1 Trillion in foreign reserves, which grow continuously by the hour (in numbers that is $1,000,000,000,000). About 70% of these reserves are concentrated in the US Dollar ($700 Billion).
- China's gold as a percent of total foreign reserves is about 1%....and it is reported China plans to increase the gold percentage by an additional 4% to a 5% goal.
- There are approximately 34,000 troy oz in a tonne
- Total annual gold production in the entire world is a mere 2500 tonnes
To increase gold reserves by 4% China needs to buy
$40 Billion in gold on the open market. THIS IS NOT POSSIBLE WITHOUT CAUSING THE POG TO SKY-ROCKET. However, for the sake of this illustration, let's assume China could buy it all at a fixed price of $625/oz. In this event China would acquire approximately 64,000,000 ozs, equivalent to 1,882 tonnes.
Let's put this into perspective. 1,882 tonnes represents 75% of the Total yearly gold production in the entire world (ie 2500 tonnes).
But as I previously mentioned THIS IS NOT POSSIBLE WITHOUT CAUSING THE POG TO SKY-ROCKET.
What is absolutely certain is that China must and is diversifying its foreign reserves out of the US Dollar and into other major world currencies, including gold. It is also well nigh certain that China has for sometime been secretly buying gold...and most certainly will continue to accumulate gold until is reaches its prudent target of 5%. However, we need to to remember China's US dollar reserves will continue to mount DAILY as long as the US Trade Deficit is a reality. To be sure, the ONLY way for the US Trade Deficit to reverse is to sharply devaluate the greenback, which would propel the POG into orbit....that much faster.
Summation of the Monumental ramifications of China's necessity to buy gold:
- Indubitably, the rising POG in recent history is in part due to China's covert gold purchases. Moreover, China's gold purchases will continue unabated for years to come, during which in my opinion the POG may reach US$1200 to US$1500/oz.
- Any respite in the rising POG is an opportunity to buy more before the the price surges even faster and higher.
Recent news:
BEIJING -- China should take steps to diversify its holdings of reserves out of low-yielding U.S. treasuries and into other currencies as well as long-term strategic assets, economists said in remarks published Friday.
As China's foreign exchange reserves have grown well past $1 trillion, a vigorous debate has emerged among domestic economists on the appropriate management of the funds.
Qin Chijiang, a professor at the Central University of Finance and Economics in Beijing, said Beijing should use its foreign exchange to make long-term investments in industry and finance to achieve higher returns, according to the central bank-backed Financial News. He added China could also use foreign exchange reserves to boost its natural resource and technology stockpiles.
"All central banks are trying to diversify...we have had a very clear diversification plan for several years," Chinese central bank Governor Zhou Xiaochuan said Thursday in Frankfurt, according to a Reuters report. Zhou said that the central bank is considering lots of instruments of diversification, according to the Reuters report.
The report sent the U.S. dollar sharply lower versus the euro in trading Thursday on concerns China would move out of dollar assets. Economists believe Chinese demand for U.S. debt has been a major factor in keeping U.S. interest rates low.
Peking University researcher Dou Erxiang, in the Financial News article, was cited as saying China needs to build a new management system for its foreign exchange reserves to independently manage the funds in a more market-oriented way.
Dou added China should diversify away from U.S. dollar assets and should moderately increase its holdings of euro and non-dollar assets.
In recent months, Chinese State Television reported that the country's foreign exchange reserves had past the $1 trillion mark. In fact China surpassed Japan earlier this year as the world's biggest holder of foreign exchange reserves.
China's dire need to diversify its foreign reserves will propel the price of gold to unprecedented new all-time highs...regardless of what action the US Federal Reserve Bank takes in cutting the Fed Funds rate. Whereas in the past the price of gold may have been a function of US interest rate levels, going foward it will be forged by China's ever growing US dollar reserves from relentless trade surplus.
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Vronsky, GOLD EAGLE, 10:39 AM, 08-31-07
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