No reason to dilly-dally with a trend this large. So, let’s start today with a chart …
Those bars track the amount of gold, in tons, flowing into China through Hong Kong. The data comes directly from the Hong Kong Census and Statistics Department. The most recent plot point, the green bar, shows gross imports exceeding 102 tons in January 2014.
Some of the media coverage that emerged when Hong Kong released the January figures a couple weeks ago told the story of Chinese gold demand in retreat, noting accurately though certainly not importantly, that the January imports were down from about 126 tons in December. That, certain media outlets assured, was a sign of slackening demand in the Middle Kingdom and, ostensibly an indication that China’s consumer economy is on the downslope.
That’s one way of reading the data … albeit, the wrong way.
Reality, as the chart overtly shows, is a much different animal. It’s an animal that says China has not-so-secret worries about a currency crisis in the West. And it tells me that China might just be trying to corner the market in gold.
I have joked in financial books I’ve written that “poor people plan for Saturday night; the rich plan for three generations.” You can apply a similar analogy to China. While America’s disastrous financial situation means we plan for the immediate needs of tomorrow; the Chinese are planning years in advance. We’re impulsive and reactionary; the Chinese are patient and plodding.
That chart offers a smidge of insight into what I mean.
Despite the media’s cursory and wrong assessment of January,[inlinetweet prefix=”” tweeter=” @SovereignInvest” suffix=”#Gold”] the Chinese are methodically accumulating more and more gold. [/inlinetweet]Despite the media’s cursory and wrong assessment of January, the Chinese are methodically accumulating more and more gold. The chart shows that in every single month of 2013, the Chinese imported more gold than they did in the same month a year earlier. And the 102 tons this past January is an ongoing extension of that trend. Month-to-month comparisons are irrelevant because of changes in the way the Chinese spend. For instance, one would expect January and February to be lighter than other months of the year because of Chinese New Year preparations and celebrations.
But from a holistic view, the trend is sparkling in its clarity: China is accumulating very large sums of gold at the very moment the Federal Reserve’s actions here at home are – temporarily – keeping a boot heel on gold’s desire to push higher.
And that raises a question of great significance for investors and savers: If gold is the dead commodity that so many commentators claim it is, why are the Chinese buying so much of it? After all, the 1,500 tons of gold the Chinese imported into Hong Kong last year alone represented roughly half of all the gold produced in 2013.
Are the Chinese mentally deficient? Are they so wealthy now they have nothing else to spend their money on but golden trinkets?
Or are the Chinese so clever they see something we don’t?
Follow the Leader
Officially, China has just shy of 1,100 tons of gold in reserve. Don’t believe official numbers.
That number was last reported in 2009. A lot has changed in the intervening five years. During that period, China has become the world’s largest gold producer … and the world’s largest gold buyer. Hong Kong has become the world’s largest importer of gold, the former British colony clearly doing the bidding for the Chinese.
When the Chinese next report the country’s official gold holdings, possibly this spring because China likes to do things in five-year periods, I’m betting the number will top 5,000 tons – possibly as much as 6,000 tons –based on known mining volumes inside China and the amount of gold that Hong Kong’s Census and Statistics Department says has been imported.
China has been such an aggressive gold buyer in recent years that I have to wonder, “What’s up with that?”
And I think I have an idea. I think China sees that the West has poisoned itself with debt … and that the antidote the West is using to sustain life for the time being – excessively low-interest rates – will never work.
China, in short, sees the West racing towards a currency crisis, most likely centered on the cancerous U.S. dollar. The fallout will clearly hurt the Chinese since the country owns roughly $1.3 trillion in U.S. Treasury paper. But how convenient will it be for the Chinese in a crisis-addled world to own possibly the largest horde of gold, the only form of money that has survived every currency crisis the planet has ever known?
As currency upheaval undermines the dollar, gold prices will rise. It’s the inverse relationship between the dollar and gold that I’ve shown here many times. And while China would lose money on its U.S. debt, the value of 6,000 tons of gold will approach half a trillion dollars of more, depending on how high gold prices soar in a world where the dollar dies.
Thus we come to the ultimate fortune cookie message: He who follows China, follows the golden path.
Until next time, stay Sovereign …
Jeff D. Opdyke
Editor, Profit Seeker
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