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How China Plans to Change the Way Gold Is Traded

By Porter Stansberry
Saturday, February 25, 2012

Today, the global price of gold is largely controlled by just five "bullion banks" in London. These banks establish the price twice a day by offering to buy or sell gold at a fixed price. The world's other markets operate largely off these prices.
Manipulating the price of gold (and thus the value of other major currencies, like the U.S. dollar) is possible by influencing those five bullion banks: Bank of Nova Scotia, Barclays Capital, Deutsche Bank, HSBC, and Societe Generale.
Whether that's happening right now or not, I can't say. But it is a matter of public record that the world's eight leading governments conspired from November 1961 until March 1968 to suppress the price of gold by using their central banks to manipulate the London bullion market. So it has happened before.
Meanwhile, the trading range of the gold price suggests that the market continues to be heavily manipulated.  
Why do I believe that?
Because as a precious metal with no yield, gold should be a fairly volatile asset – like silver and platinum are. But when you look at how many times the price of gold moves by more than 5% in a day, you find that it almost never happens.
Over the last 10 years, the price of gold has moved up or down by more than 5% on only 10 occasions. The same volatility has occurred in silver 80 times. It has happened in oil 137 times.
No explanation other than manipulation can account for gold's exceptionally low volatility. It simply doesn't trade like a free-market commodity.
As I explained yesterday, to control the market for gold, the Chinese must not only accumulate massive gold reserves (which it's doing), it must establish the world's leading exchange – and regulate it honestly.
And that's exactly what's happening...
For decades, Chinese citizens were barred from owning physical gold under penalty of imprisonment. Then in September 2009, China became the only country in the world to promote gold ownership to its citizens. The government started a major campaign to encourage all citizens to buy gold. Locals can now buy gold bars, which come in four sizes, at ANY Chinese bank in the country. If you don't think that's unusual, try buying gold at ANY bank in the United States and watch the funny look you get from the teller.
The Chinese government has also set up thousands of gold "stores" around the country... which look like jewelry stores, but instead sell bars of gold.
As Forbes recently reported at the scene of one such gold store...
The crowds surge shoulder to shoulder inside Beijing's Cai Bai store to buy 5 to 10 gram slivers of gold and jewelry of every size and shape. It's one dramatic example of the gold craze in China, which is officially and unofficially promoted by the Communist government... And it is an integral part of the pro-gold preference by the Chinese public and its government.
My friend Simon Black – who writes about geopolitical, expatriation, and wealth issues on his Sovereign Man website – also visited one of these Chinese gold stores on a recent trip, and said...
On the inside, these gold stores look like jewelry shops – armed guards, glass viewing cases, etc. But instead of diamond crusted earrings and white star sapphires, you see bars. Lots of bars. The government mints bars in sizes ranging from 5 grams (which are so tiny they're actually cute) to 1 kilogram. The prices are updated instantly – they have a Bloomberg screen that tracks the spot price... and the bars are all serialized and [offer] 0.9999 purity, the same as you would get from Switzerland. They are also certified by the gold exchange, which validates the quality.  
We went into several stores and saw Chinese people buying like crazy... all with cash. The most popular denominations were 10 grams and 50 grams, as well as every piece of jewelry in sight. I'm surprised the mint shops didn't sell out [as] the inventory was flying off the shelf. 
Why would the Chinese government set off a frenzy for gold?
Well, here's one thing to remember... the Chinese government doesn't pay much attention to human rights or property rights. It could demand all of its citizens' gold at any time – just like FDR did in the U.S. back in 1933.
But all of these facts are just hints about what's to come. The real story won't be unveiled until June. That's when China will open something called the Pan Asia Gold Exchange (PAGE). This is a direct competitor to the London Metals Exchange and the COMEX in New York.
The way things work right now, the futures market in London "fixes" the spot price of gold each morning and afternoon, based on trading in London and on America's COMEX market.
But both of these markets back gold contracts with only 10% of the actual metal. The new China PAGE market is expected to have a much larger gold backing and could change the way gold is traded.
As James Turk's GoldMoney site recently reported:
The potential effects cannot be underscored enough – PAGE is clearly preparing the world for a Chinese world reserve currency, and is doing this by bringing gold, and by extension silver, back into the Chinese economy.
Forbes wrote about the development...
It means the spot market in gold could be headed for China – and away from London's Metals Exchange or the Comex in New York. It also means that the Chinese currency – not dollars – will for the first time become the ruling currency used in one of the major speculative commodities of our age. All eyes will be on the influence of the gold trade in China rather than New York, London, Switzerland, or South Africa.
For several years, we've been warning about the loss of world reserve currency status for the U.S. dollar. We have worried about our currency because we understood the propensity of governments to steal from their citizens through inflation.
With roughly half of our national debt held by foreigners, we have long believed efforts to print away our obligations will prove catastrophic for America's leading international position – and most especially for the role of our dollar as the world's leading reserve currency.
But until recently, we were unsure of the exact mechanism by which the dollar would be replaced. Now, we see how it will unfold...  
The Chinese will slowly hedge their exposure to the dollar by becoming the world's leading gold investors. By taking over the world's gold markets and building a huge stockpile of gold, they will be able to back their currency with the world's traditional form of money.
Once they are ready to make the yuan freely convertible, they will have created tremendous demand for their bonds and bills by making their currency the world's most reliable... and the only one backed with gold.
The impact on the dollar could be catastrophic... And every day the dollar falls, China's gold stockpile will grow more valuable (and more powerful). You can protect you and your family from this potential collapse with a handful of very simple steps... the first one being to own plenty of gold.
Good investing,
Porter Stansberry

Further Reading:

We are in the middle of a currency war... one that will wreak havoc on the lives of millions of ordinary Americans, much sooner than most people think. Learn more about what's happening here...  
China is extracting colossal sums from both the United States government and ordinary citizens, like you and me.
This will sound crazy to most folks. But that's because most folks don't understand gold or why it represents real, timeless wealth. The Chinese do.
The Chinese might already have more gold than any other nation on Earth...

Market Notes


Another year of the gold bull market has passed. And the yellow metal still counts superinvestor Warren Buffett as a detractor. Recently, Buffett reminded folks he doesn't "get" the idea of gold.
Our chart of the week shows Warren might just be jealous. It also shows how listening to him has been a losing deal for the past 10 years. You see, when it comes to "Buffett versus gold," over the past decade, it's no contest.
Today's chart displays the performance of Buffett's legendary holding company, Berkshire Hathaway (black line) versus the performance of gold (gold line) over the past 10 years.
Since the stock market began climbing out of its bear market back in 2002, Buffett's company has gained around 62%. Gold, on the other hand, has gained around 500%. While we're fans of Warren's wealth-building ability, we're even bigger fans of listening to the message of the market. And for a good long time, it's been saying, "You missed the boat, Warren."

Stat of the week


Increase in Iowa farmland values in 2011, according to a land value survey performed by Iowa State University. It's the largest yearly increase ever recorded by the survey.

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