Michael Kosares: China turns IMF gold sales into a wet noodle


By Michael Kosares
Centennial Precious Metals, Denver
Saturday, April 25, 2009


There may be some misunderstanding about the increase in Chinese gold reserves. The bulk of that gold has come from purchases of their own domestic production, not open-market purchases, so the impact on the price is indirect. But because China is the largest gold producer in the world and it is retaining the bulk of its production for reserve diversification, the impact is significant.

Consider, for example, if South Africa had been able to retain the bulk of its production when it was the prime producer. Today it would be one of the richest countries in the world. As Pierre Lassonde reminded us in the recent past, there haven't been any large gold discoveries in many years. That puts China in a very strong position with respect to the gold market, and from what we can gather, it has decided to play that card.

Because of its strong exports, China doesn't need to export gold as South Africa did to sustain and strengthen its economy. China will be able to build gold reserves and make the yuan stronger -- its financial muscle being the weight of its gold holdings, which are likely to grow year to year and perhaps even accelerate as new fields are brought into production. In addition, as the price of gold rises so too will the value of China's gold reserve. The currency advantage is the one thing the press reports so far have overlooked, and as time passes, that advantage may be the most important.

Now I realize that all of this is not quite so glamorous as China buying up every loose official-sector ounce, but at the same time what I have here will have a greater long-term impact than any purchase of a one-off official sector sale. True to its reputation for patience and steady progress toward its long-term goals, China has taken the golden path -- and now China wants the world to know about it.

Last April in my "Golden Gut Check" essay (http://www.usagold.com/amk/abcs-goldengutcheck.html) I mentioned the importance of China keeping its gold production home. At the time the market overlooked it as a major factor in pricing. Now, with publication of a gold reserve gain that occurred over a five-year period, hard numbers are available. China seems to want to make a point and the general market seems to have recognized its importance. (The China gold story made the front page of the Financial Times' weekend edition.)

Taking this discussion a step further (and this might be worth another essay by itself), at some point the Chinese might be very interested in a gold revaluation that compensates it for its dollar stockpile, and others might be willing to go along with this as the least offensive means to bringing balance to the international economic equation. That gold revaluation could occur informally with the market moving steadily higher over the years in a free-market dynamic, or it could occur formally as a return to an international gold standard. I hardly need to explain what they would mean to gold owners the world over.

While we ponder the growth of the Chinese gold reserve, let's not set aside the other major gold story from China during the past week. China's request that the International Monetary Fund sell the entirety of its 3,217-tonne reserve coincides with China's announcement on its gold reserves and is intended to deliver a message to the financial markets: China sees gold as an important part of the international monetary scheme -- a scheme that may evolve into a system. If China were to purchase the full 3,217 tonnes at $1,000 per ounce, the price would be $103 billion. With China's foreign exchange reserves at $1.95 trillion, the price of all the IMF gold would be a paltry 5.25 percent of China's total reserves, leaving China with $1,847 billion in total reserves apart from gold.

China has turned the bludgeon of IMF gold sales into a wet noodle.

(And, by the way, China would then become the largest holder of gold in the world after the United States and the European Union.)

The message contained in China's actions of the past week is unmistakable. China knows that gold is making a comeback almost as a force of nature.

Gold's return to the center of value will be dictated by history and events with or without the help of governments. I believe China is preparing for that day, and from its perspective apparently it cannot prepare fast enough. The first step toward stability for both individuals and nation states is a step in the direction of gold, and China has taken it.

Talk about following in the footsteps of giants (with a nod to my old friend, Another, who posted his thoughts at the USAGold.com Forum, such as these from 1998:

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Saturday, January 10, 1998


Someone once said, "No one wants gold -- that's why its U.S. dollar price keeps falling." Many thinking people laugh at such foolish chatter. They know that the price of gold is dropping precisely because TOO MANY people are buying it.

Think now: If you are a person of great wealth is it not better for you to acquire gold over years at better prices? If you are one of small wealth, can you not follow in the footsteps of giants? It is an easy path to follow! An experienced guide is not needed for this trail, Look around you and see. The real money is selling ALL FORMS of paper gold and buying physical. Why? Because any form of paper gold is loosing value much, much faster than metal. Some paper will disappear altogether in a fire of epic proportions.

The massive trading continues at the LBMA but something is now missing: The central banks are no longer lending. They will not anymore. We have reached production costs. Oil will have nothing of "gold paper" if gold must stay in the ground. And a central bank values the wishes of oil far above return of its leased gold!

Hear me now: If gold tries to go lower than US$$280 the Bank for International Settlements will buy it OUTRIGHT in the OPEN for all to see. They must. They will. I know. For no currency system could stand if oil were to bid for gold.

Oil has kept "the deal" as the central banks sold paper gold to lower gold's price. All is fair. Asia will bid for gold not as in the past. They now know that the free flow of oil has more value than the Pacific economy. But the price that was paid may be more than the world currency system can endure.

The U.S. dollar has risen on a flight of fear. That will now end as the LBMA shorts are given to the wolves. If this fire burns too hot, gold will turn and its trading will be halted. The price of oil will explode as gold becomes the world oil currency. Even now oil has locked the IMF's gold. Asia will bid against them no more. We come to extreme times.

Risk not your wealth in paper. We enter a period of truth.


Michael Kosares is proprietor of Centennial Precious Metals in Denver and host of its Internet bulletin board, the USAGold.com Forum:


Readers interested in Kosares' commentary and other timely commentary about the precious metals are invited to join the USAGold Newsgroup here:


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