Gold: What Do the Chinese Know That We Don’t?

Wednesday, 14 May 2014
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Published in Gold Investing
Gold: What Do the Chinese Know That We Don’t? PhotoDune.
Gold simply won’t stay under $1,300, but that hasn't stopped it from trying. Prices dipped toward $1,280 early Monday, before bargain hunters stepped in to push gold higher; and the buying has been steady the first half of the week. In early trading Wednesday gold was up $11.01 to $1,304.43, and silver was up $0.27 to $19.79.

Fiscal-Cliff

Silver, which has been unfairly priced for some time, got the better end of the deal overall, with the silver/gold ratio dropping from 66.9 to 65.8 in just a week. If you took my advice last week to load up on silver, you’re a happy camper today.

It may be more than simple bargain hunting for physical bullion keeping gold prices over the $1,300 mark; there may be some institutional support as well. For a long time there has been speculation that China has been using depressed precious metals prices to accumulate gold.

Normally I’m not one to get caught up in these types of speculative stories because they go around all the time. China is intelligently quiet about their gold purchases, as announcing a buying spree would send prices soaring. This time, however, the accumulation has been going on long enough and at high enough levels that word is starting to filter out. In many ways the gold market is still a relatively small community, and it’s hard to keep big secrets indefinitely.

Besides keeping prices down, the Chinese have another good reason to keep quiet about their gold purchases. It’s no secret that China is poised to surpass the United States as the largest economy in the world, probably sometime between now and 2016. That will be a major shock to anyone not paying attention, which means it will surprise just about everyone. Just that piece of news alone will be devastating enough to the US economy and, perhaps more importantly, to the image of the US economy abroad.

Now imagine that, just before the news breaks that China is the world’s largest economy, the Chinese government shocks the world by announcing they've also accumulated the globe’s largest stockpile of gold. If the speculative numbers are even close, it’s a stockpile that could be orders of magnitude larger than anything market analysts had been expecting. The world’s largest economy also with the world’s largest supply of gold — let that sink in for a few minutes. I’m not one for conspiracy theories, but that sounds awfully like a country setting themselves up to knock off the world’s reserve currency.

During the recession, the Chinese took their idle labor force and made massive investments in the country’s infrastructure, including a huge expansion and modernization of their high speed rail system. In the US meanwhile, we spent our time on political infighting and slashing our investments in infrastructure. The Chinese were building the most modern transportation system on the planet, and we spent our time quibbling about how many weeks of unemployment people out of work should get.

We've set ourselves and the rest of the planet up for an economic shock that could be crippling in intensity. If the Chinese succeed in replacing the dollar as the world’s reserve currency, that would be an economic gut-punch that would send the dollar into a death spiral, and gold prices into low earth orbit. If you thought the recession in 2008/2009 was bad, that would look like a walk in the park compared to what will happen when China takes over at the top of the economic pile.

At this point there’s no way to stop what’s coming; the only rational thing you can do is make sure the fixed percentage of your wealth you keep in hard assets is up to date. If you’re behind, then now’s the time to catch up. Waiting until next year could very well be too late.

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