We are on the verge of a golden shock.
I wrote recently about plans by the International Monetary Fund (IMF) to include the Chinese currency as one of the reserve currencies that back the IMF’s so-called Special Drawing Rights.
Well, there’s another facet to that story that you need to know … and it echoes the warnings I first began voicing in early 2014.
As part of the IMF’s plan to bring the yuan into the basket of reserve currencies, IMF officials want Chinese authorities to provide an update on the quantity of gold squirreled away inside China’s vaults. That news, when it’s released, will be a wake-up call to the world. It will underscore the degree to which sovereign governments outside America value gold, and it will send the price of gold higher as global investors and savers comprehend the ramifications of the number China ultimately reports.
3,510 tons of gold.
That’s the estimate of China’s gold holdings that’s currently floating around the media. If that turns out to be the true figure, it would be more than three times the 1,054 tons of gold that China last reported officially in 2009.
That whisper number, I believe, is much too light.
Based on the quantity of gold China mines each year — it’s the world’s largest gold producer — and on the reported quantities of gold flowing into the country through Hong Kong and Switzerland, I calculate that China more realistically owns somewhere between 5,000 tons and possibly as much as 11,000 tons of gold.
Such a quantity would shock the world … because, primarily, it would raise enormous questions about where China collected all this gold.
China doesn’t mine enough to account for the spike. And the consumption of gold globally for jewelry and industrial uses takes up nearly 66% of global production, meaning that even if China bought every other ounce produced each year, that still would not account for the large increase in its holdings.
No, some of the gold in China’s vaults would have to come from a very large seller of gold … and the only large seller would be another central bank. (Which one — and you know which one I’m talking about — is a subject for another day.)
Instead, let’s stay focused on what China’s quantity of gold would mean to us directly…
It would be a clear indication that China is establishing the yuan as a competitor to the dollar. Lots of Western commentators will laugh at that — a communist country with a reserve currency? They are so blinded by historical norms — the dollar’s reserve currency status for the last 70 years — that they fail to accept that history is ever-changing. The status quo is always in flux.
It would also be a clear indication that gold isn’t an archaic form of currency. It’s a very modern currency, one that serves a very real and useful purpose today as disaster insurance. It’s just that it’s a form of currency that government cannot manipulate, which explains why U.S. monetary officials routinely pan the metal as essentially useless.
The rest of the world doesn’t feel that way.
They see gold as the financial asset that it has been for thousands of years … which is why nations including Germany, Switzerland, Austria, Belgium, the Netherlands, France and others are repatriating (or looking to repatriate) their national gold held in the Federal Reserve and the Bank of England.
China’s report to the IMF, when it comes, will be the next big event to highlight the importance of holding gold today.
I say it all the time, but the message remains crucial to your financial well-being: Buy gold. Buy it often. Stash it away in whatever you deem the safe place (not a bank safe-deposit box). And sit patiently. The world is on the verge of a golden shock that will redefine global power … and likely send gold prices marching higher.
Until next time, stay Sovereign…
Jeff D. Opdyke
Editor, Profit Seeker