Friday, April 17, 2009

China wins Gold and Silver and Bronze

This is I hope a short post, but lately once I start writing a blog entry it takes on a life of its own. The topic for today is a followup to my previous postings on China's role in the current world wide economic crisis. Of course if you've read my previous posts you know that I believe that China is not acting alone, but is actually being backed and advised by the same financial oligarchs that have led the US to ruin. As a result I can only come to the conclusion that the current financial crisis is part of a plan to shift power from the US to China. And of course the big losers in all this are the American people. While of course the big winners are the International Bankers.

OK, enough introduction let me get to my topic for today.

I have two articles that I would like to bring to your attention.
[Thanks to Max Keiser at for highlighting these two articles. This is a great site for getting the latest behind the scenes news on financial issues.]

While the two articles in some ways seem to be contradictory, I believe that taken together they give us a better view of how China hopes to increase its economic power at the expense of the US. China's economic strategies in the past few decades have been executed flawlessly, and I can't help but thinking that they have been getting extensive expert advice into the workings of the capitalist system from International Bankers like Goldman Sachs.

But again, I've slipped into a long introduction so let's begin looking at some excerpts from the articles.

China wins Gold

First up is China's push for the IMF to sell all of its gold reserves.
India and China may press for the sale of the entire gold reserves of the International Monetary Fund (IMF) to raise money for the least developed countries.

The IMF holds 103.4 million ounces (3,217 tonnes) of gold that, if sold, can fetch about $100 billion.
The G20 heads of state meeting in London earlier this month agreed to sell a part of the IMF gold to raise $6 billion for poor countries during 2009-11. This was a component of a $1.1 trillion package worked out by G20.
How the sale will affect the bullion market, with attendant problems for currencies, has not been assessed. A large part of the gold may find its way into central banks and private players. Since most of its will be out of reach for retail markets, gold prices may not get hammered.
What follows is my interpretation of this article. And I warn you that even though this article talks about India and China, I'm going to completely ignore India in this discussion and just talk about China because I think that India is a relatively minor player in this game.

The background is that the IMF wants China to contribute more money. China recently agreed to contribute $40 billion. But it appears that China is placing extra conditions on any further contributions to the IMF and one of these is that the IMF sell all its gold. Once that gold goes on the market, China will use some of its forex reserves (mostly dollars) to buy up the gold. It's important to notice that the article states that the IMF has already agreed to sell some of its gold, but what is unique about this proposal is that it demands that the IMF sell all its gold.

This is important because China's gold reserves are paltry compared to the US. The US has over 8,000 tons of gold while China has about 600 tons. And since the central banks of the world have an agreement to control the sale of gold, China has no way of making up the difference despite its huge forex reserves. But the IMF with more than 3,000 tons of gold is the world's third largest holder of gold, behind only the US and Germany. If China could get its hand on most of this gold, then it could use that gold to as a form of collateral to backup the yuan and turn its currency into a world reserve currency like the US dollar. And the price for this is a relatively cheap $100 billion dollars.

Remember that today's fiat currencies such as the dollar are no longer backed up by gold as they used to be under the old Bretton Woods agreement. So China can't just walk up to the US Treasury and demand that its dollars be converted to gold. And what happens to China's dollar holdings when the Fed starts printing more dollars? Well it becomes devalued and there is nothing that China can do about it. Unless it can find a way to convert those dollars into hard assets. Which segues nicely into our second article.

But first I want to make one more comment about this article. The article is also interesting because it answers the question I had posed in an earlier article about how the IMF got to be one of the top holders of gold in the first place.
The IMF has built its gold reserves over 40 years. The historical value of the gold, as declared in its balance sheet, is $9.3 billion. Four major sources helped build the reserves. One, member- countries paid in gold their 25 per cent initial quota subscriptions. Two, interest charges on credit given by it were collected in gold from many countries. Three, member-countries can sell gold to it to fight a temporary liquidity crisis. And four, they can make loan repayments in gold
Uh, on closer reading, even though the article says there are four sources of gold for the IMF, I think it can really be simplified to just two.
  • Initial payments from IMF member countries. This seems to be something like an initiation fee paid in gold - kind of like an initiation fee you pay to join a health club. Except this club is very exclusive and is by invitation only
  • Payments from debtor countries. Rather than take their payments in a fiat currency the IMF cleverly demanded payment in gold. That's not Visa Gold, no that's gold bullion. This is kind of like the mystery of what happened to all the gold that Spain acquired through its South American colonies. Answer:  The International Bankers got it as payment for debts. That should be a lesson to the US. 
China also wins Silver and Bronze [and Copper and Aluminium, Zinc, Nickel...] 

Our second article written by the superb journalist Ambrose Evans-Pritchard begins with this summary, "Hard money enthusiasts have long watched for signs that China is switching its foreign reserves from US Treasury bonds into gold bullion. They may have been eyeing the wrong metal.".

OK, so now you see why I say that these two articles seem to be contradictory. The premise of this article is that China is not attempting to accumulate gold but is accumulating other metals instead. I think this premise is a bit misleading if you take into account the story about China pressuring the IMF to sell all its gold, but nevertheless this article does reveal a parallel strategy on the part of the Chinese government to buy up other metals.

And again, I have a strong feeling about where the Chinese central bank is getting its advice from. Remember that Zhou Xiaochuan, the governor of the China's central bank, is also a member of the Group of Thirty. And Wall St. firms like Goldman Sachs and Morgan Stanley also have a strong presence in China. I wonder to what extent these firms have themselves invested in commodities futures while advising China to buy commodities. You see there's more than one way to manipulate the markets, and what better way than to use other people's money?  In this case the "People's Republic" money. And if Goldman Sachs can make use of insider information to make a handsome profit, don't you think that they are going to do it? Technically I suppose something like this would be illegal under "insider trading" regulations, but then who's going to call them on it? The SEC? P-lease!

Time for an excerpt.
China's State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons.

Nobu Su, head of Taiwan's TMT group, which ships commodities to China, said Beijing is trying to extricate itself from dollar dependency as fast as it can.

"China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact, and can cover their infrastructure for 50 years."
The SRB has also been accumulating aluminium, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters) and praseodymium (glass).

While it makes sense for China to take advantage of last year's commodity crash to restock cheaply, there is clearly more behind the move. "They are definitely buying metals to diversify out of US Treasuries and dollar holdings," said Jim Lennon, head of commodities at Macquarie Bank.
So according to the article there appears to be no question as to what China is doing and why it is doing it. They are converting their cash into physical commodities while that cash is still worth something and commodity prices are relatively low. And there appears to be no doubt that their purchases go far beyond their industrial needs for these commodities.

But is there perhaps even more to this story? Read on.
Zhou Xiaochuan, the central bank governor, piqued the interest of metal buffs last month by calling for a world currency modelled on the "Bancor", floated by John Maynard Keynes at Bretton Woods in 1944.

The Bancor was to be anchored on 30 commodities - a broader base than the Gold Standard, which had caused so much grief in the 1930s. Mr Zhou said such a currency would prevent the sort of "credit-based" excess that has brought the global finance to its knees.

If his thoughts reflect Communist Party thinking, it would explain the bizarre moves in commodity markets over recent weeks. Copper prices have surged 49pc this year to $4,925 a tonne despite estimates by the CRU copper group that world demand will fall 15pc to 20pc this year as construction wilts.
We keep hearing about deflation and lowered worldwide demand for commodities and yet in a "bizarre move" copper is up 49%. And how much of that copper was bought on US exchanges I wonder? And how much through Wall St. brokerages I wonder? Did any Wall St. brokerages take a long position in copper just as it was getting ready to make that sharp and "bizarre" move upward? Just wondering.

And what is this about the "Bancor". We've been hearing a lot about an IMF SDRs proposal from Zhou Xiaochuan lately, but this is the first I've heard of the Bancor. Could the SDR proposal have been a diversionary move in this game of global chess while the real Chinese goal is to adopt the Bancor as the new world currency to replace the de facto US dollar?

According to the article the Chinese have truly mastered this game of worldwide economic chess.
The beauty of recycling China's surplus into metals instead of US bonds is that it kills so many birds with one stone: it stops the yuan rising, without provoking complaints of currency manipulation by Washington; metals are easily stored in warehouses, unlike oil; the holdings are likely to rise in value over time since the earth's crust is gradually depleting its accessible ores. Above all, such a policy safeguards China's industrial revolution, while the West may one day face a supply crisis. 
I don't doubt the intelligence of Chinese officials, but even with a winning hand this economic game is not an easy won to win - just ask the Japanese. I suspect that the Chinese are getting some very sophisticated advice from some US advisers that appear to be putting their own interests and the interests of China above the interests of the United States. If the US government does not do something soon, we will find ourselves in a very compromised position.

Oh well, the post turned out a little longer than I had first imagined. But not too long I don't think. I hope you've enjoyed reading it and that it has given you some food for thought.

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Anonymous said...

"Expert advice from US?"

You americans think too highly of yourselves.

Frank Hope said...

Yes "expert advice" on the workings of the international capitalist system.

China is still a communist country. It does not have the experience of the US in international capitalism. China sends its best students to the US to study business.

The fact that Wall St. crashed the system does not take away from the fact that they are still the experts. Who else could have hatched the whole derivative scheme and actually gotten away with it? Do you think China or Japan could have pulled off something like that?

Only the Americans (and their allies the British) have the expertise and the power to control the world markets. This may change in the future, but for now this is the reality.

purple said...

There is a push by US banks to break into China, but they have not been able to do it significantly. China's state banks basically run things.

Wall Street's power comes from the dollar. Goldman Sachs wants to profit off Chinese migrant labor, but the don't want to lose their own power.

That's why a true challenge to dollar supremacy will mean war, in my opinion.

China's positioning at the moment is more defensive.

Frank Hope said...


I agree with much of what you have to say. I have considered the possibility of war with China. But its hard to imagine what form such a war would take. It's hard to imagine an open all out war between the US and China. Especially since both countries are nuclear powers.

I've also been considering the possibility recently that the US has allied itself economically with China in order to fight off a challenge from the European Union. In this scenario it is the US-British-Chinese vs. the EU.

The problem with this sort of strategy is that China has its own agenda and appears to be using the US to achieve its own goals.

I do think that China would be willing to wage a limited war for Taiwan. Ultimately China wants the US out of Asia. The problem that China has with this strategy is that other Asian countries fear China as much, or even more than the US. So Japan and South Korea will continue to ally themselves with the US in order to keep China in check. China is attempting to soften its image, but Asian memories are long and there is deep-rooted distrust of the Chinese.

China is approaching this like a game of global chess. It is attempting to maneuver the US into a position where it can force the US to tacitly surrender without ever having to fire a shot.

See my previous posts.

China is the new IMF: US faces austerity plan
Israeli missiles target US Aircraft Carriers
The International Banker's China Syndrome