China’s Gross Shortage of Gold Reserves
Compare the total foreign reserves of the world’s major countries: China: $3.3 trillion; US $150 trillion; Germany $256 trillion; Italy: $187 trillion; France $190 trillion.
This means China’s FOREX risk is infinitely greater than any of the other countries, because only a tiny fraction of its total foreign reserves are in gold.
Assuming that China embraces the merits of gold's FOREX diversification, its central bank would need to buy an additional 44,600 tonnes of the shiny yellow. Put this into perspective by comparing it to two benchmarks: The world's total existing aboveground gold (about 172,000 tonnes), and the world's total yearly mine production (about 2,600 tonnes).
China's gold deficit represents 26% of the total existing aboveground gold. If it were to buy up all the newly mined gold in the world, it would take the next 17 years to accumulate 44,600 tonnes (which would leave nothing for anyone else).
The longer China procrastinates over increasing its gold reserves, the longer it suffers purchasing power losses in its TFR portfolio, today estimated at $5 trillion and counting.
China needs to buy gold in the open market from existing holders, and to buy up newly mined gold when available. This will inexorably forge new yearly all-time record highs in the value of the yellow metal.
The need for China to increase its gold holdings will grow apace with its bigger trade surpluses, which rise relentlessly year after year.
This means there will never be a peak gold price. There will certainly be corrections, but these will be temporary and will mean buying opportunities for investors who have just ‘discovered’ gold's incredible total return as compared to all other investment vehicles.
Since 2008, the Fed’s QE policies fueled gold up 100% without any help from Chinese buying. And the Fed has said QE will remain in effect indefinitely. Soon, China will soon be buying gold hand over fist to reduce its US dollar exposure. Consequently, we may see gold over $6,000 per ounce by 2016.
The US Monetary Base and Gold
A sharp rise in the US monetary base 2008 coincides with the implementation of various quantitative easing programs.
We’ve already experienced QE1 and QE2. Under QE3, the Fed is purchasing $85 billion per month in mortgage-backed securities and US Treasuries until the unemployment rate falls to 6.5% while keeping inflation under 2%..
Since October 2008, the US monetary base is up 194% while gold is up only 102%. This suggests that the US monetary base can now buy more ounces of gold at current prices then it could in October 2008. Or, it would take a higher gold price to match the ratio in October 2008. Gold today would have to be $2,400 to match the ratio in October 2008.
Gold is also closely correlated to the US debt. In October 2008, US public debt was $10.7 trillion. Today it is $16.3 trillion, a 65% increase. As the debt limit is increased, the price of gold should rise accordingly. The US is adding roughly $1 trillion annually to the deficit. Of course, these are official figures. The unofficial figures are much higher.
The US reports 8,133.5 metric tonnes of gold in their reserves. If it were to use gold to back the US monetary base, gold would have to be $9,745 per ounce. Even backing 40% of the US monetary base, gold would need to be $3,898 per ounce. This assumes that US gold reserves exist; there has not been an audit since 1953.
It has been suggested that in order for the US to get its monetary house in order it should back the dollar with gold. Chapman’s research suggests that, whether looking at the US monetary base per capita compared with gold or using the US gold reserves to back the US monetary base, the price of gold is too low. So while gold has been trading in a range for the past 15 months that could soon end. As the US monetary base rises and the US debt rises, gold should go up with it.
Putin Turns Black Gold to Bullion as Russia Outbuys World
Scott Rose & Olga Tanas
Russian President Putin says the US is endangering the global economy by abusing its dollar monopoly, and he’s not just talking; he’s betting on it. Not only has Putin made Russia the world’s largest oil producer, he’s also made it the biggest gold buyer. Russia’s central bank has added 570 tonnes of gold in the past decade, a quarter more than runner-up China.
“The more gold a country has, the more sovereignty it will have if there’s a cataclysm with the dollar, the euro, the pound or any other reserve currency,” said Evgeny Fedorov, a lawmaker for Putin’s United Russia party.
Gold has soared almost 400% in the period of Putin’s purchases. Central banks around the world have printed currency to escape the global financial crisis, sapping investor appetite for dollars and euros and setting off a scramble for safety.
In 1998, the year Russia defaulted on $40 billion of domestic debt, it took as many as 28 barrels of crude to buy an ounce of gold. That ratio tumbled to 11.5 by the time Putin first came to power a year later and in 2005, after it touched 6.5—less than half what it is now—the president told the central bank to buy.
Quantitative easing by major economies to support financial asset prices is driving demand for gold in the emerging world. Before the crisis, central banks were net sellers of 400 to 500 tons a year. Now, led by Russia and China, they’re net buyers by about 450 tons.
Russia’s total cache of about 958 tons is only the eighth largest, however, after the US, Germany, the IMF, Italy, France, China and Switzerland.
For now, with more than five years left in Putin’s term, Russia plans to keep on buying. “The pace will be determined by the market,” said First Deputy Chairman Alexei. “Whether to speed that up or slow it down is a market decision and I’m not going to discuss it.”