Does China have a hidden agenda on gold?
China is currently in some economic difficulty which could impact internal stability and some feel that the global megapower is planning to utilise gold to reboot and pick its way out of an economic meltdown.
Posted: Friday , 24 Aug 2012
LONDON (Mineweb) -
One thing that is most apparent about China relative to virtually any industry is that nothing is done without the approval, or instruction, of government. When you have an enormous population of over 1.3 billion - around 20% of the global population - the government's policies are all aimed at maintaining order among its people, and for the past decade or so this has revolved around massive internal growth. This has been done, first by becoming the world's supplier of cheap goods, and second the building of an internal demand economy to help support this massive annual growth.
Nearly half the country's population has moved from the country's old rural economy into a modern industrial one - but this is now seen as faltering under massive bank debt, much of it in potentially bad loans brought on by government-engendered cheap finance supporting the country's internal manufacturing and infrastructural growth. Given the Chinese state-owned company aims are not necessarily to make money, but to provide employment, this may not be a sustainable economic model, which could have some dire consequences for those companies, particularly in the resource sector, which have been providing the raw materials that help keep the Chinese factories maintaining uneconomic production levels.
In the past we have seen Chinese companies begin to make inroads into securing future supplies through investing in and taking over resource companies around the globe, but while the emphasis has so far been in respect of industrial metals to feed the manufacturing behemoth, we are now seeing similar moves into the western gold mining sector - of which the most recent example is China National Gold Corporation's interest in taking over control of African Barrick Gold. And prior to that the Zijin Mining takeover of Norton Goldfields among others. An earlier, but perhaps less well flagged deal was China National Gold's offtake deal with Coeur's Kensington Mine in Alaska whereby the mine's output is processed in China, not in Alaska where the mine is located. It would seem that these deals, or prospective deals, could be the tip of the iceberg if some views on China's gold policy are correct.
These views suggest that China is hugely expanding its own gold reserves, but doing so surreptitiously - a view we have expressed here beforehand. Last time China announced a gold reserve update was in 2009 when it suddenly announced it held 1,054 tonnes of the yellow metal - a 75% rise from its 600 tonnes reported in 2003. If a similar time gap is involved before China reports its reserves again, this will come in 2015 and some feel that the next reserve figure could show that China has accumulated more than a thousand tonnes of gold over the period. Indeed some have suggested a Chinese target of an additional 4-5,000 tonnes to bring it in line with some of the bigger Western gold holders.
There certainly have been a number of statements from senior figures in China suggesting that the country should be increasing its reserves and has been buying on price dips. Add to that China's own official gold production, which may understate the actual figure, which has by law to be sold to the state and one certainly can't rule out the likelihood that reserves are being increased substantially Even when gold appears weak there always seems to be a strong support level indicating a very big buyer out there. Could that be China?
China is also rapidly moving to become the world's biggest importer of gold, while exports are prohibited - and here again, although there have been elements of gold fever in buying by Chinese individuals at various points over the past couple of years, it is certainly conceivable that some of this is being bought by official sources.
Now this is all surmise - but bear in mind that in a controlled economy like China's the government tells you only what it wants you to know, or believe, and everything is aimed at the preservation of the state and the Chinese Communist party. There is little transparency in the Western sense.
Take global gold reserves - China's official 1,054 tonne holding is but a fraction of that of many Western economies. China is also said to be sitting on a surplus of over $3 triilion in U.S. denominated assets - which is, in effect, monopoly money. It would therefore be logical that some of this could be converted into hard assets, notably gold, which the Chinese see as a more stable ‘currency' than the U.S. dollar which, in China's view, is continually being devalued by the U.S. Fed's QE and associated monetary easing programmes.
Also, China has seen the huge advantages that have accrued to the U.S. from its currency being used as the global reserve currency. China would very much like to put itself in a position, perhaps not to usurp the U.S. - although this would be the ultimate target - where it has a dominant seat at the global trade table and there have been a number of recent moves which reinforce this interpretation of China's aims with the setting up of bi and multi lateral yuan-based trade deals, and the development of precious metals exchanges where gold and silver will be able to be traded in yuan. Indeed, if moves continue at the current pace, and the country actually is growing its gold reserves at say 500 tonnes a year (which is certainly not impossible), by the end of the decade it could push its way through to pole position in the global economic stakes.
If it can do this it could then use its dominant currency base to stimulate its own trading sector - and China largely lives by trade, although its domestic consumer base rises by the day - much as the U.S. has over the past few decades since the dollar usurped the pound sterling as the global currency of note.
And, as we noted here back in 2009, China has also actively been persuading its citizens to buy gold and silver through its banking system, as well as through traditional traders, through TV, radio and billboard advertising. Should China announce at some time in the future a very significant jump in its gold reserves, this would really kickstart another significant gold and silver price leg up, thus substantially enriching its citizens who have been buying gold and silver. Some may see this as China embracing the capitalist system - but again we re-iterate that in China virtually no new initiative is taken without government approval and backing.
It is actually probably too soon for China to take the step of announcing a substantial gold reserve increase yet, but if the basic scenario is correct China will thus continue to support the gold price on dips until such time as it sees fit to upset the global gold apple cart.
iPad Version: Picture published courtesy of REUTERS/Claro Cortes