Gold Forecaster
- Global Watch
China will affect the gold
price - why?
Julian D.W.
Phillips
Nov 14, 2006
People's Bank of China Chairman
Zhou Xiaochuan said in Frankfurt that China is considering various
options for diversification.
Statements from a man this
senior in the decision making process are to be taken notice
of. Other academics and economists have been recommending this
path for some time, but few have taken notice of them. Now
it is believed that action will be taken, why?
Earlier this week Chinese
state television said foreign exchange reserves have reached
$1 trillion.
China found itself with large
$ reserves once it embraced Capitalism more than 15 years ago.
Then the reserves turned from large to huge. This was a worry,
so measures had to be taken to manage such money, so spending
on imports to assist in the development of the country was instituted,
foreign investments were allowed and encouraged and all was well,
but still the reserves grew far beyond the pace of the ability
to use them and keep them in proportion to requirements. And
now they have reached a level of U.S.$1 trillion, after China's
trade surplus surging to a record $23.8 billion in October.
Please note that China has a trade surplus with almost every
other nation on this planet! So the problem is not to do with
surpluses, just U.S.$ surpluses!
Its measures to accumulate
its reserves in a basket of currencies in line with the trade
it has with other nations is getting there for sure, but it is
the $ component that is the worry! China Business News cited
the executive vice secretariat of the Chinese Society of Macroeconomics,
who warned that the US dollar is currently "unstable"
and that as 70% of China's foreign exchange reserves are held
in dollars, the country could lose 1 trillion Yuan if the
U.S. $ fell 20%. We understand this to mean that this fall
would be against the Yuan. Seen from outside this could be
translated as the Yuan appreciating against the $, which is what
the U.S. and others are baying for. We've seen a 3% fall in
the last couple of weeks!
In an interview last March,
the Chairman Zhou stated clearly that the P.B.O.C. would not
sell the U.S.$ and he is unlikely to change course. So how
can China diversify from the $? If it set one foot in the foreign
exchanges to do so the alarm bells would ring and the $ would
tumble, so that's not really a good option with that many $'
to sell.
China has about 70% of its
foreign exchange reserves in the U.S.$ but is adding to overall
reserves at the rate of U.S.$15-20 billion per month. To diversify
away from the dollar, the Chinese authorities could ensure that
all non-U.S. transactions are denominated in currencies other
than the U.S.$ even accepting the local currency of the nation
it is trading with?
Another danger with accumulating
so many U.S. $' is the growing dependency of the U.S. on China's
ownership of its dollars. On the other side of the coin there
is the vulnerability of the U.S. to Chinese ownership of so large
a part of the U.S.' monetary instruments, as well as its money.
After all just how many U.S.$' can they accumulate before they
realise that they are as dependent on the States as the States
are on them?
The country should spend its
excess foreign exchange holdings overseas says Xia Bin, director
of the financial research department of the State Council, or
cabinet. Clearly the reserves should be spent on building up
the infrastructure of the nation and securing future important
supplies to enable the Chinese economy to continue to expand
and be self-sufficient, but the accumulation is so speedy that
they just can't do that.
The Chinese and 'Official'
gold
So will the Chinese
buy gold? When asked if gold was on the list of instruments
to be used by the Chinese central bank as it diversifies its
foreign exchange reserves, Chairman Zhou replied, "That's
a separate thing". Of course it is!
China has a government that
controls its people, even if it is acting to serve and enrich
them. Banking systems on the one hand are there to make profits,
but also to control money. We may believe they benefit us and
many do, but be sure, they will not willingly allow or encourage
systems they cannot control when push comes to shove. Gold
is uncontrollable! India gives adequate proof of this where
the banking system has failed to bring most Indians under it
wing. The Indian government has even failed to effectively
tax or regulate the average Indian middle class citizen. Both
these institutions are disrespected in India and have failed
to develop the same rapport with their people that has occurred
in the West.
It is also unlikely to be able
to do so because of the assistance of gold in defeating such
objectives. So no wonder the Chinese authorities are slow in
embracing gold. After all gold is money when all else fails!
But the worry of the Chinese
is the instability of the U.S.$, so the time is rapidly approaching
when such control will be lost amidst volatility and instability
that attends monetary crisis. At such times confidence transfers
from government controlled money to gold. The Chinese are fully
aware of their inability to accumulate sufficient gold from their
own sources and the international gold market. We do think
they will buy their own locally produced gold, but would be surprised
if they bought other gold.
But to affect the gold price,
they just have to act on their fears of the instability of the
$. Then others will! This is enough to make Investors, traders,
et al, go for gold. Certainly such statements from China bring
the $ crisis closer and for confidence to move closer to gold!
After all if the world's foreign biggest owner of offshore
$' thinks its $ investments are unstable how could all of the
rest of us not do so?
Nov 12, 2006
-Julian
D.W. Phillips
email: gold-authenticmoney@iafrica.com
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