With Time magazine’s momentous selection of Ben Bernanke as Person of the Year, there were reports of people dancing in the streets in, um, Oslo. Leave it to Time to figure out a way to make Henry Luce roll in his grave while the magazine tries to outdo rival Newsweek in the race to claim publishing’s trophy for irrelevance. While the understandably isolated delirium over Bernanke’s selection subsides, we thought we’d update the prospectus on gold with a contribution from a Rick’s Picks subscriber who has requested anonymity. His thoughts run counter to the popular notion that investors can count on steady buying from China to lend buoyancy to bullion quotes. As the writer makes clear, China may have a mind of its own, and it will not always be perfectly aligned with the thinking of gold bulls. Here we go:
While many precious metals bulls have been insisting for months that China is gold and silver’s greatest ally, we saw first-hand last week exactly how capable the Chinese are of pulling a rabbit out of a hat when need be. Much of the finger wagging for the recent decline in the price of gold – as usual – has been directed towards those dastardly Americans. This time
around, the gold bull’s disdain had to do with the recent US jobs report on December 4. Yes, the numbers – which are unquestionably fabricated – had an impact on the precious metal markets; nevertheless, those gold bulls who insist upon using the adage of “see no evil, hear no evil, speak no evil,” where China is concerned are fooling themselves and living in a sugar-coated dream world.
A full two days ahead of the jobs report, Chinese officials called gold’s recent surge a “speculative frenzy.” Yet, it is the jobs data that bears the brunt of the blame for gold’s pullback. China had nothing whatsoever to do with this? Since when did they become our friend? Furthermore, how do we know the U.S. and China didn’t act in unison here? A little of the “I’ll-scratch-your back, you-scratch-mine,” thing between old friends.
Damned Lies, and Statistics
Phony jobs report or not, who in their right mind believes statistics coming out of the U.S. to begin with? Perhaps those who frequent tractor pulls and WWE wrestling events are so naive. Maybe even Middle America. But then, they’re not typically the ones buying gold, are they?
Big government is big government, and while China and the U.S. clearly have their differences, they also have a responsibility to co-exist and cooperate wherever possible, even though what we read in the papers and see on television often appears to dispute that. Why would anyone think China is any less qualified than the U.S. for pulling off a performance in price suppression where gold is concerned? Now that is naïveté.
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{ 21 comments… read them below or add one }
Thank you, Rick and Anon, for putting some much needed muscle on my skin and bones comment from last week.
Using my nom de plume “Paul,” I wrote, and Rick gratiously published:
Paul 12.05.09 at 3:12 am
“Is it just a coincidence that we heard rumblings earlier in the week from Chinese authorities about gold having run up too fast? Aren’t they the ones trying to buy gold and dump dollars? Sounds like their prayers were answered today with cheaper gold and a stronger dollar. “
I think the only thing that can be reasonably counted on from China and other similar-thinking countries is that they will prevent mass sales of gold (such as from the IMF) from hitting the market. A good example is the recent sale to India. Otherwise dumping 200tons of gold on the market would probably have suppressed prices for a while, depending on how the gold was actually sold.
China seems to generate a lot of speculative fervor in the Western World. The Government of China may say and do something for public consumption but they will never reveal their true state of mind. No X-ray can see through the thick Iron Curtain that the ruling Communist party has devised to run China.
All Gold-producing countries such as South Africa, Australia witnessed their currency appreciation as they have a free market. Chinese yuan is pegged to dollar to keep their goods competitive and export-worthy. They wish to retain their hard earned status of a manufacturing hub of world and keep their 1200 million population working. They need US consumers much more than the rest of world does. They have great stake in survival of US and dollar.
The Chinese can never be net buyers of world gold, as they produce lot of Gold internally. WGC says Chinese produce the largest quantity of Gold in the world, more than South Africa. Public participation in Gold is far less. The activity at retail physical stores and exchanges is insignificant. In Shanghai markets, spot Gold is at few dollars discount to world Gold prices for most days of year. They sell physical silver at 3 to 4% discount to spot prices for most of the year. The higher the prices, the more discounts can be bargained.
Price Maker status shall remain with US exchanges for many more years. The rest of world has to be price taker. If you do a volume study, daily 600 to 700 tons of Gold are traded at US Comex and other exchanges. Any serious analyst has to just track all other exchanges of world, put them in a table and add up, it requires simple math to realize that rest of world doesn’t come near that quantity.
There will be a lot of speculation in media about a hot commodity. One has to sit and do his calculation. Even for deciding to buy a shirt, we scan several stores, why not do our home work for investing our hard money.
Well, as per Rick’s erstwhile nemesis Erik Janzsen’s work, China and the U.S. are inextricably and unavoidably bound together as they both need each other to maintain their respective economies. With that in mind, they could very well be colluding where the price of gold is concerned.
Now, having offered that, I will say that there may be a hole or two in the aforesaid theory, and I challenge denizens of Rick’s Picks to find them.
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With all due respect to Eric Janszen, I expect China to be the first country to emerge from the Global Depression and, moreover, to achieve strong growth even if the U.S. continues to wallow for another 50 years. China will have two huge markets to sell into: domestic; and the Pacific Rim, where a voracious middle class is likely to emerge in the next secular upswing. I also think China is strong enough to write off its huge exposure to the U.S. dollar. In fact, they will already have done so, since they are not so stupid as to think the U.S. will somehow avoid going broke. RA
Rick, while the following picutre is/should be well known, the 1/2/1939 issue of Time and its MOtY says it all about that vaunted honor:
http://www.time.com/time/covers/0,16641,19390102,00.html
To this columns author, a question:
Your comments sound plausible, and do make sense. But, is it perhaps the Chinese’s motivation to help the price of gold fall, so they can keep/resume acquiring more gold at a more adventageous level, to them, vs. the US (and the short banks) motiviation to just get the price down?
Fekete has pointed out that it is very likely, that the supposed naked short position in silver is actually not naked, but just covered with non-exchange silver held by the Chinese, in their very astute money making via trading the basis instead of the metal.
Could that perhaps be true in gold also?
Couple of points:
1. Me thinks at least part of the run-up to 1200+ was Barrick buying out its hedges so quickly. This move may have “frightened” the Chinese a bit to get them to try and slow down the move.
2. The trading of the mining stocks seems to indicate underlying strength. While the big cap names are getting the run around the small and midcaps are hard to buy at prices I want to pay. So far the pull back has not been there (like JAG, AGI.To, GRS, GPR etc).
3. Gold seems to be slowly decoupling from the Euro. Whiel the moves may still be similar (but not always) the magnitude is less. The Euro as of tonight is all the way back to August levels, gold not yet.
4. As for China leading the way … Rick, have you ever been to China? I would heartily recommend a trip to see the fantastic advances … and the vast distance still to climb. I went there for the first time 27 years ago, backpacking by myself in a sea of green and blue for 6 weeks. I then learned Chinese and I think have some understanding of the culture.
The best blog on Chinese economics is http://mpettis.com/. The other day Micheal Pettis had an interesting blog post, one of the best lines in it was the following: “This (China) is not an economy where price signals always decide business strategy.” He is so right.
China’s economy is terribly unbalanced and I would not trust a single number coming out of the government. They literally just make stuff up. If the central government wants 8% growth, then every region reports 8% growth – who is stupid enough to report 2%, and still hope to keep their job.
Gold will go higher. China will be a buyer. The Chinese people will be buyers (after all where would you put your money – in a Chinese bank full of bad loans paying no interest or someplace “solid”).
Well, Rick, that is the argument against Mr. Janszen’s thesis, namely that the Chinese will somehow sell all their stuff to themselves and a burgeoning “middle class” in the Pacific Rim nations. I must admit that I have doubts about with both your and Eric’s preferred outcomes. First, and foremost, I question the timely development of a sufficiently robust middle class in the Far East. Having said that, I still think that China, for geo-political reasons, and regardless of their own internal vulnerabilities- quite considerable vulnerabilities by my reckoning- may decide that it would be worth the hit to discontinue playing the role (at a time of their choosing, of course) of chief enabler of U.S. financial profligacy. So, even though I harbor doubts about the evolution of a sufficiently large cohort of Asians to take the place of the soon t0 be defunct U.S. consumer, I still prefer a scenario where China does not feel that giving the U.S. the boot is tantamount to engaging in MAD, as per EJ’s assertions.
The Chinese depressing gold prices? They are the world’s biggest producers, so why would they be interested in lower gold prices?
Interesting perspective, I found the “speculative bubble“ noise out of China to be particularly odd as well.
1. Until as recently as 2002, you could be jailed in China if you were to be found in possession of gold or silver. Beginning in 2009, the government is actively encouraging its citizens to invest in it, to the point where they advertise it on their state TV stations.
2. China has repeatedly chastised Uncle Ben, Timmy, and Company for taking such risky actions and abusing their fiat printers. They have been promoting a move to the SDR (and gold).
That coupled with Greenspans *observations* about the gold rush indicating a move away from other currencies.
3. China is on pace to take the largest consumer of gold award from India.
4. There are rumors out that China may soon ban exports of gold and silver
5. Several Chinese companies have been seeking to begin or advance mining projects around the world, Latin America in particular. Ultimately they might not need the IMF to sell its reserves – especially since those bars with the gooey tungsten centers disappointed Hong Kong.
I am but a very small player, but I am waiting along with the India and other countries as well as the people of India and other countries for yet another great buying opportunity provided by whomever…bring it on.
You may be correct ,however China is a net buyer of gold and the US ,who knows.Sooner or later these differences will emerge .Hence the threat the Chinese made in august about defaulting on some investments in the US . I suspect it had something to do with gold and silver futures .
I have no doubt China is talking down gold to be able to buy it lower. That may or may not be the reason gold has corrected a reasonable amount after a steep run up. There’s almost always good reasons for any move in any market – in retrospect. The trick is keeping you eye on the big picture. And the fundamentals for gold are what count over time. Jawboning does not quality as a fundamental. Neither does the manipulation of statistics.
An interesting take. Gold lowering raises the dollar. That is our QUID PRO. What I can’t see is China’s QUO?
When China made their comment that gold was in a “speculative frenzy” I remembered thinking, “there is no way they believe that. This is just a way to drive gold down so they can buy more.”
Daman posted this comment previously that I agree with wholeheartedly:
“The Government of China may say and do something for public consumption but they will never reveal their true state of mind.”
Still looking for another Goldilocks Bear.
Most here still in the buy gold and stock on dips mentality. Ouch.
Re Chinese impervious power, in 1989, invincible Japanese Ascendancy was the myth after they bought Pebble Beach and Rockefeller Center. In less than a decade Japan defaulted and were out, having begun two lost decades because they refused to let big banks go bankrupt, a lesson for the USA. Expect similar to happen with China. Liberty an invigorating market tonic, which Ds may discover if they do not stop big government takeovers of energy, healthcare and technology in the next 10 months and are deselected in 2010…
Good article. Always remember the Chinese will ultimately do what is in their own
best interest. The trick at times, is to figure out what that might be.
I completely concur with these thoughts. I don’t think the Chinese fully understand the GATA story and that Gold should be trading above $5,000 right now.
If they did, they wouldn’t be dickering around with joining the Fed in trying to talk and manipulate gold down.
You are absolutely right. I stopped bying physical at 700 Euro. China and the US don´t want to buy gold, they NEED to buy gold. What would I do? I would kick the market down until the weak hands go: aar you and your gold-bull is so full of the same…
Then I´d buy up the market still being bearish with words.
Until I feel fed and then I say, oops no more gold there? And the markets go ga-ga. actually, a bit like 1980, but probably all more extreme.
Only question remains: can they still rigg it? I bet yes. And surely hope so.
Question: how much of the market is the people-buy-gold-program of the Chinese to be?
Rick may well be correct in his thesis (he is imo) -the Central Banks hold a large portion of there paper-or pixel “wealth” in US dollars…They also know that the US dollar is “simply too debt ridden” to remain viable.
However, if gold rises too fast-it spooks all of them-as all there paper money is unbacked as well. If the dollar collapsed-it would be the end of all fiat money-and the other Central Banks are not prepared for that type of crisis (for a number of reasons) at this stage-so they defend the dollar and sell gold at critical junctures.
They are playing beggar thy neighbor-for as long as they can-but the key here is…
there is now “simply too much debt” and it must be defaulted upon and or inflated away.
EOM
Hey Rich,
Gold is in an eight year uptrend. Buy the dips doesn’t work? Wrong. 100% wrong. I don’t know what you read or pay attentiuon to concerning gold, but it certainly isn’t the experts I follow. Talk of a “gold bubble” going on now is ridiculous and has zero merit. Gold is an easy double or triple from here longer term. Either that, or the Dow is coming down to 1000.