The Great Chinese Gold Mystery

cina oro

di Walter Snyder, Swiss Financial Consulting

This Newsletter has often referred to the nefarious manipulation of the gold price and the glorious advance of the yuan towards recognition as an international reserve currency. A recent Bloomberg article of 21st April 2015 (“Mystery of China’s Gold Stash May Soon Be Solved as IMF Beckons”) raised the question of how much gold the PBoC really has and when the secret would be revealed. The point is that the admission of the yuan to the rank of an SDR (Special Drawing Rights) currency, subject for discussion in May and final approval in October by the IMF, so far benignly viewed by Christine Lagarde, could be favored by the knowledge that China has amassed a large quantity of gold, which would further its candidacy for the coveted recognition fervently desired by the Party leaders in Beijing.

What is known is that China is the largest global gold producer. 2014 gold production may have been about 14 million ounces, which is more than 400 tons. Gold imports in 2014 from Hong Kong were 814 tons, but that is not the only channel. The latest figures supplied by the PBoC are from 2009 for 3,510 tons versus the 8,133.5 tons of the US. How much gold will the PBoC have accumulated since then, more than five years ago? One can only guess at this point in time, but something between 2,000 to 3,000 tons might be possible. It could be a lot more.

The important question is why should a central bank pile up bars of fine gold  (99.99), each of which weights 12.5 kilos. Cui bono? Such an accumulation gives work to gold miners and helps to buoy up the prices of gold mine stocks. The amount of international trade is so large that gold cannot possibly be used as a means of exchange for commercial purposes. The gold market is too small. The basic fact is, however, that a fiat currency is only feasible if people are willing to accept it. A number in a computer is only worth what people are ready to provide in exchange. The atavistic power of gold makes it psychologically suitable to furnish backing to a fiat currency. It is something that a number in a computer can be compared with. A large pile of gold in a bank vault can be reassuring to people even if they never see a gold coin in their hands. Faith and trust in a fiat currency can be built up by relying on a horde of gold as a guarantee. Fiat lux. Silentium aurum.

Trying to wean people away from gold, which is what apparently those engaged in the great gold conspiracy are attempting to do, namely, shorting gold to drive down the price and discourage investment in gold, is doomed to fail. Goldman Sachs will never succeed in extirpating certain archetypes, however hard they try.