Gold Fever In China: A Signal Of The Next Financial Crisis?

Investment Watch Blog

The Gold Fever has burst out in China.

Gold is one of the rarest metal and therefore one of the most preciuos.

According to data from the World Gold Council, throughout the whole human history only 165,000 tons of this metal have been extracted. In order to give an idea of how small is the amount mined, we can say that all the gold in the world can be stored in a room of twenty cubic meters per side.

Its scarcity makes gold so precious.

In recent years, China is experiencing a fast and hyperbolic economic growth. In fact, in 2011 it became the second largest economy in the world and it will become the first within a few years, surpassing the United States.

Evidently China’s economic growth also weights in the consumption of precious metals. According to the World Gold Concil, in 2010 the demand for gold in China was 579.5 tons, more than doubling the United States’ one, that only reached 233.3.

As reported by Forbes, 25% of world production ends up in China. The dragon is in fact one of the advocates of the return to increased gold reserves in its central bank.

Since 2007, when China overtook South Africa, the country has been the world’s leading producer of gold and has registered a record production of 340 tons over the last year.

Despite this record, the huge domestic demand has quintupled the imports in 2010 compared to the previous year. During the first month of 2011, the gold rush had an additional sharp rise, considering that the Industrial and Commercial Bank of China sold nearly 7 tons of physical gold against the 15 tons of the entire 2010.

The passion of the Chinese giant is becoming a real fever, but it is legitimate to ask what reasons can be found for such a frantic storage. It is not easy to answer, but it is possible to make some hypotheses.

First, the government could play this card to protect domestic investments, diversifying the excessive money stock generated by exports.

Anyway, the main investment was represented by the U.S. dollars and T-bonds: China holds the largest dollar reserve in the world, more than 2,800 billion, and owns the highest share of U.S. public debt (additional 1.16 trillion).

Secondly, this accumulation could hide the need to protect themselves against the high prices of agricultural goods. In this sense, the FAO warns against soaring costs, and the World Bank in its recent report predicts shortages of food and possible patchy rebellion.

There could be also other, disturbing hypotheses. China may wish to impose its currency, yuan, as the world’s reserve currency, instead of or in parallel to the dying dollar. To do that, its economy, though having a very driving force, needs to be consolidated, guaranteed and protected by a strong gold backing.

If China decided to accelerate the growth of its gold reserves, as a necessary step to internationalize the yuan, we can well expect a considerable leap up of the prices of that commodity. According to various sources this is already beginning to happen.

For example, Chuck Butler, Senior Vice President of EverBank stated that the gold could reach $ 5,000 an ounce in coming years, while Kenneth Rogoff on Project Syndicate assumed even a share of 10,000.

One thing seems certain, however. According to the Wall Street Journal, China will allow the direct conversion of their currencies into other currencies from next April, to encourage and facilitate the exchange of its traders.

Although the possibility of replacing the dollar with a golden coin is theoretically ruled out, as stated in paragraph 1 of Article 4 of the Treaty of Accession to the IMF, which was ratified in 1978, there are no immutable laws.

These agreements could go downhill or being redefined because of the upheavals and the reconfiguration of the hierarchy amongst real economies in the multipolar era. Therefore, this hypothesis is not so unrealistic. Even Brazil, during the last G20 conclave, expressed loud and clear its proposal to replace the dollar with a basket of currencies (including the yuan, the real carioca, the Southafrican currency etc.). Indeed Russia has already called along those lines for alternative solutions.

The great debacle of the of the financial economy’s hegemony, which has been underlined by the public rescues of its main sanctuaries (Wall Street and the City of London), caused a shift of resources towards commodities (i.e. gold, food), tangible goods that are no longer purely paper.

Nonetheless, the gross product of the United States is still made up of the “financial products” and the exports of military industry (which mainly live in symbiosis with the state budget). The North American consumers actually consume too many imported goods from China.

During the last visit of the Chinese President in Washington, the world audience witnessed an unexpected capsize of perspective. China has signed contracts with Boeing for 600 million dollars. In return, Obama had to tolerate the Chinese top leader saying, just within the walls of the White House, that the dollar was not eternal, and since it had already completed its main function, the world is going towards an evolution. Who would have imagined something like that five years ago? The reality often exceeds the imagination.

In other words, Hu Jintao, has laid his cards on the table openly and, most importantly, its is not a gamble nor a stunt: he could because he has the needed muscles and energies to defend his arguments. The week before the visit of Hu-Jintao, exactly on 11 January, China tested with success the Jian 20 fighterbomber (J-20), which could provide a very high competitiveness – if not superiority – in the air space, upon which depends an important part of the strategic hierarchy. Will the US be remembered for the forced landing of their aviation jewel, after the violation of Chinese airspace?

The latter hipotesis, the most disturbing: the certainty that we are on the verge of another global financial turmoil could be the crucial reason of the gold rush in Beijing.

Because of the muddled restructuring of the 90s and the interventions against the crisis, all countries and top industrial economies are highly indebted. China diagnoses and bets upon the “Western collapse” trying to find a shelter to protect itself from this possible and imminent global financial crisis.

In short, is the great crisis behind us or are we just on the brink of an abyss, temporarily averted in the years 2008 and 2009 with large transfers of public money to banks and businesses?

References

http://www.gold.org/
http://www.forbes.com/sites/robertlenzner/2011/02/12/chinese-demand-for-gold-surges-to-around-25-global-production/
http://www.bloomberg.com/news/2011-02-17/china-s-gold-investment-demand-jumps-70-council-says-update1-.html
http://www.project-syndicate.org/commentary/-10-000-gold-
http://www.pbc.gov.cn/publish/html/2010s09.htm

have a look here to see the gold reserves of china compared to those of the United States
http://data.worldbank.org/indicator/FI.RES.TOTL.CD/countries/CN-US?display=graph

Sources :

1. Investment Watch Blog
2. Image Credit

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