China's Gold Coup d'Etat

What it means for global gold owners

Special Report

Michael J. Kosares – GoldSeek.com

Editor’s Note: This issue of Review & Outlook is based on a series of posts I made at the USAGOLD blog over the course of the past month. China has imported an unprecedented amount of gold bullion in 2013. So much so, that if it were to maintain the current pace, it would import nearly the equivalent of global production for the year. When the news first filtered out of China on the amounts of gold being mobilized through its Shanghai Gold Exchange, the numbers seemed too large to be believed. The obvious question became “What is the source of this extraordinary amount of gold bullion?” It was only in October when Reuters reported that much of that gold had been shipped from London-based exchange traded funds to Switzerland for refining into smaller Asia-friendly bars and then on to Hong Kong and Shanghai that the full picture came into focus and the extraordinary numbers gained credibility.

Below I detail how the China gold trade mechanism works, the reasons for it, and why China’s interest in gold is likely to remain of paramount importance to the global market for many years to come. I have updated the original statistics from recently posted reports at the Koos Jansen website based in the Netherlands — a research source specializing in the China gold trade. To stay abreast of the China situation as well as other developments in the gold market on a daily basis, I invite you to visit our blog page linked above.

Part One – The London-Zurich-Hong Kong-Shanghai gold conduit 

According to a recent Reuters report, the United Kingdom’s gold exports to Switzerland jumped from 85 tonnes to 1,016 tonnes in the first eight months of 2013 — a twelve times increase. Some bullion market watchers attribute the huge increase to withdrawals or sales from exchange traded funds (ETFs) — an explanation that covers only half the story…….if that. When one learns where this gold ended up and why it went there, the true importance of this unusually large deployment begins to take shape.

Switzerland, according to the Koos Jansen website, has exported over 600 tonnes of gold to Hong Kong through August, 2013. Hong Kong, in turn, has exported over 700 tonnes of gold to the Chinese mainland over the same period through the Shanghai Gold Exchange. Through August, 2013 Koos Jansen puts the total Chinese gold mobilization through the SGE at a stunning 1672 tonnes. Now, with this report of ramped-up exports from the United Kingdom, another piece of the puzzle falls into place and we begin to get a fairly clear picture what these gold mobilizations entail. Switzerland and Hong Kong are acting as a conduit of western gold on its way to China — and probably, at least in part, to Chinese central bank reserves.

To what extent this gold mobilization is the result of some yet-to-be-identified external pressure on London’s bullion banks, or simply business as usual, remains to be determined, but gold movements of this size usually do not occur in a vacuum. Hedge funds have been in the gold ETF liquidation mode since April, at the behest, it seems, of certain bullion banks that have issued generalized ETF sell recommendations to their clientele (which includes the funds). The ETF selling has been blamed repeatedly for the rapid drop in the price. If all of this has been a ploy to drive down the price on paper and channel substantial amounts of physical gold to China, who is the winner in this game and who is the loser? And why is it being done?

The gold market is incurably opaque (no matter how diligent or persistent the arguments to the contrary that it isn’t or that it should not be), and that is probably why so many are intrigued by it. Yet, at the same time, those who innocently own gold for asset preservation purposes can rest assured that they will never become collateral damage in these affairs as long as they do not allow themselves to lose patience or forget the reasons why they purchased gold in the first place.

Commencing to have doubts about the currency

Gold is never sought by those who think all is well with the world. It is sought by those who believe that things could go wrong, or indeed, that things have already gone very badly. That true believer might be someone of incredible private wealth, as was the case with Bernard Baruch in the 1930s, or it might be a great nation-state like Germany or China today. When the sitting Secretary of the Treasury asked Bernard Baruch why he was buying so much gold, the reply came quickly that he “was commencing to have doubts about the currency.” China and Germany — the former by buying gold on the open market and the latter through its gold repatriation program — no doubt, are acting on doubts of their own. Up until today, we were unaware of the degree to which those doubts had manifested themselves in the hidden corridors of the world gold market. . . .Now we know. In the first eight months of 2013 China produced 270 tonnes of gold from its mines, and theoretically almost four times that amount through its London – Zurich – Hong Kong – Shanghai gold conduit. In future years, China’s gold import operations likely will be considered a major financial coup d’etat.

The Telegraph’s Andrew Critchlow explains that China’s consumption of raw materials makes it “only a matter of time before the renminbi replaces the dollar as the primary currency for trading commodities and resources such as crude oil and iron ore.” He comes to an ominous conclusion: “The debt ceiling farce in Washington and China’s growing reluctance to continue underwriting the US economy by buying up its bonds and adding to America’s near $17 trillion (£10.5 trillion) debt mountain suggests that this tectonic shift in the global trade system could be just around the corner.”

While financial markets’ attention was riveted on Washington’s budget theatrics, the United Kingdom and China quietly entered into a game-changing currency swap arrangement that will allow the two countries to trade for goods and services directly in their own currencies, thus cutting out the dollar middle man. “All of a sudden,” says Kathleen Brooks, research director at Forex.com, “there’s potentially no dollar risk.” The two countries quickly followed the swap arrangement with easier access to Chinese financial markets for British investors, including we might assume London financial firms, and the same for Chinese banks in the United Kingdom. By circumventing the dollar, the UK and China are sending a strong message on the greenback’s future as the the world’s sole reserve currency — all toward a “de-Americanized world’ as China’s state -owned Xinhua news agency put it.

Zhu Baoliang, an economist in China’s State Information Center, a research unit of the National Development and Reform Commission, a powerful planning agency, told Financial Times, “We need to continue to diversify. Even without this latest debt debate, it would still be necessary to diversify.” With this endeavor, it seems China and Europe have crossed a Rubicon of sorts and shifted the playing field in financial markets. It’s one thing for Iran or Libya to challenge the pre-eminence of the dollar, but another thing entirely when China and Europe do it.

continue article at GoldSeek.com:

http://news.goldseek.com/GoldSeek/1383244196.php