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How and Why China Came to Dominate the Market for GoldBy
Friday, February 24, 2012
Over the past few days, I've introduced an idea that I'm sure will earn me jeers and derision from the mainstream press... And probably even worse from the U.S. government.
But my job isn't to fit in with the mindless journalism that passes for the "mainstream press" these days. And it isn't to impress the U.S. government. My job is to study the numbers and report on the most important financial developments that will affect my readers.
One of those ideas is the ongoing and enormous accumulation of gold by China... which will allow it to supplant the United States as the owner of the world's reserve currency.
If you doubt this is what the Chinese are doing, I suggest you take a look at a cable that was leaked on the nonprofit website Wikileaks last year.
This cable was prepared by the U.S. Embassy in Beijing and was sent back to officials in Washington, D.C. The embassy was commenting on a recent report by China's National Foreign Exchanges Administration. The cable quoted the Chinese administration as follows...
Do you see where this is all heading?
A century ago, China used silver to back its currency. Today, it has chosen gold... And it is basically buying up the world's gold supply. China is essentially attempting to "corner" the gold market.
Just remember... no gold mined in China... not a single ounce... is allowed to leave the country. It all goes to the government's reserves. Yes, the Chinese government allows foreign companies to enter China and form joint ventures with local Chinese firms. And foreign companies are free to mine as much gold as they want in China... But every single ounce must be sold to the Chinese government at current market prices. So the government is piling up every ounce that's mined in China... at least 9.6 million ounces a year (the equivalent of 300 tons).
And that's just the beginning...
I can also say with near-100% certainty that China is secretly buying massive amounts of gold from the International Monetary Fund and other sources. I feel confident about saying this because it's exactly what the Chinese did from 2003 to 2009. If you remember... in 2009, China suddenly announced that its gold holdings had risen by 75% because of secret purchases that took place over six years.
These purchases moved China into sixth position on the list of countries with the most foreign gold reserves. But keep in mind, even with these giant purchases, China's gold holdings still account for less than 2% of its foreign reserves. That's a pittance when you compare it to places like the U.S. and Germany, which hold more than 70% of their reserves in gold.
There's no doubt in my mind that China will continue to buy huge amounts of gold.
Just over a month ago, news outlet Bloomberg reported mainland China bought 3.6 million ounces of gold from Hong Kong over the past few months... That's 483% more than during the same time the year before. The data come from the Census and Statistics Department of the Hong Kong government. The Chinese government does not make such information public.
In fact, the Chinese have not announced a single gold purchase since 2009. But when you look at the massive amounts of gold "disappearing" from the world markets, it's obvious the Chinese must still be buying. As the newswire Reuters recently suggested in an article that detailed the sale of 150 tons of gold to "unnamed" buyers, "among the most likely candidates is China, which has the largest currency reserves... at $3.2 trillion."
When you are buying this much gold, it's almost impossible to keep the entire thing a secret. That's why many stories of China's secret purchases have been mentioned in the mainstream press. For example, CNN Money interviewed Boris Schlossberg, director of currency research at Global Forex Trading, reported...
This is why the Mining Journal said last November that it expects China to amass some 5,000 tons of gold over the next five years. I would not be surprised if it amasses twice that amount. As CNN explained, "The thing to remember here is that if China is going to continue to purchase massive amounts of gold, the last thing they want to do is make this information public, until they really have to. The less they say, the cheaper the price they'll have to pay."
I recently interviewed the most successful gold and silver investor in the world, Eric Sprott, on this subject. Eric is a billionaire, who made much of his fortune in silver. He runs Sprott Resource Management, one of the world's largest resource investment firms. Here's what he told me...
Now... while I might not be able to technically prove that the Chinese are buying millions of ounces of gold bars, I can prove they're buying plenty of gold out of the ground. The Chinese government is now in the process of secretly buying up part or all of dozens of the best gold mining companies around the globe.
One of the biggest recent purchases was by the government-owned Shandong Gold Group (the second-biggest producer in China), which made an offer to purchase Jaguar Mining for $785 million in cash – that's 77% more than what Jaguar is now worth in the markets.
Keep in mind... This is the biggest premium EVER paid for a large gold mining firm. Before that, state-owned Zijin Mining Group (China's biggest gold producer by market value) said it would spend as much as $1.6 billion a year on acquisitions. Last year, the company bought 17% of Australian gold miner Norton Gold Fields and a 60% stake in gold company Altynken.
And these are only the deals the government WANTS to make public.
The government also has kept a slew of investments in the gold markets private and secret. You see, few investors realize the government's China National Gold Group (CNGGC) makes little information public on its most sensitive purchases.
For example, CNGGC has many aliases, including its 40% stake in China Gold Intl. Resources and may have more than 300 secretive investment stakes in various gold mining companies around the globe. With a tremendous amount of digging in recent months, we've been able to locate the Chinese government's significant equity stakes in dozens of junior gold mining stocks.
The point is, when you look at the gold China already has in reserve... and look at what it controls that's still in the ground... the Chinese might already have more gold than any other nation on Earth.
But even these resources don't guarantee China control of the market. To really control the market for gold, the Chinese must establish the world's leading exchange – and regulate it honestly. As I'll show you tomorrow, they are doing just that.
It's the next step in China's hidden currency war against the United States.
Good investing,
Porter Stansberry
Further Reading:
Read more about what the Chinese are doing, why they are doing it, and the near-certain outcome here...
"This new currency war with China will wreak absolute havoc on the lives of millions of ordinary Americans, much sooner than most people think."
"China is the fastest-growing country on Earth, with the largest cash reserves on the planet. And as befits a first-rate power, China's currency is on the path to being backed by gold."
Market NotesAN UPDATE ON THE WILD WORLD OF RESOURCE STOCKS After suffering a brutal 2011, things are turning around for the "junior resource" sector.
Regular readers are familiar with the "boom and bust" junior resource sector. This area of the market contains small energy and mineral exploration firms looking for next big resource find. It is among the most volatile sectors in the world.
Junior resources spent much of last year in "bust" mode. Commodity prices in general fell... and folks fled riskier assets, like juniors. The "Dow Jones of small resource stocks," the TSX Venture Index, fell 45% in just seven months. It spent the next three months digesting this loss, and "carved out" a bottom.
As you can see from today's chart, it looks like the bottom is in for juniors. The Venture Index has rebounded from its winter lows... and just broke out to its highest level since September. This incredibly volatile "boom and bust" sector could easily start "booming" again.
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