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Gold Takes Off...To China
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(December 5th, 2010) After drifting for a few weeks, gold prices soared above the $1400 level this past Friday, gaining nearly $50/ounce for the week, partly on reports officially confirming the extent of recent gold purchases by China.
This was the week of revelations, and not only the laying bare much of US diplomatic communications via Wikileaks, an act which continue to wreak havoc and embarrassment with our interests around the world, but also the Congressionally forced revelation (via the Dodd-Frank overhaul bill) of details of our Fed’s pumping liquidity, not only into US financial institutions, but also our largess with England’s Barclays, the Royal Bank of Scotland, Deutschebank, and Credit Suisse, each of whom was among the top ten recipients of dollar infusions during the recent economic unpleasantness which began in 2008.

Whether such financial intervention had the desired effect will never be known. The crisis was handled in a certain way, and today we live with the results. Unemployment reached 9.8% again this week, job growth is anemic at best, housing prices continue to sink while the pace of foreclosures continues to rise, and although it can be said that most banks are healthier than they were two years ago, little else about our economy exhibits signs of health at all.

What the likely results would have been without the massive intervention by the Fed and Treasury, in the form of quantitative easing and the propping up of AIG, Citibank, Bank of America, and GM, among others, will no doubt be debated forever. One thing is certain: our creative creation of ‘money’ to put out these fires has ramifications which the world’s currencies will long suffer from – beginning slowly at first, and then with increasing speed unless, somehow, a stop is put to it.

Gold on Friday 12/4 not only came within 1% of its dollar-value record high seen the first week of November, but also established a record early in the week when it took more than one thousand and seventy euro (1,070.11 to be exact) to buy an ounce of the timeless shiny yellow metal.

China’s increasing gold holdings have been a matter of record for some time. Domestic gold production in China has reached a record output of some 277 metric tonnes just in the period from January to October of this year, and most, if not all of that newly-mined gold is purchased by China’s central bank. Even more is imported as China adds to its own gold holdings, and even encourages her own citizens to own gold.

The question of how much gold China is importing was answered in a Wall Street Journal article of 12/3/10, authored by Carolyn Cui and Chris Oliver and entitled “China Buys In to Gold’s Allure,”

“Data cited Thursday by China’s state-run Xinhua news agency showed that China imported 209.7 metric tons of gold in the first 10 months of the year, a fivefold increase compared with the same period last year. That surpassed purchases made by ETFs and surprised analysts, who until now had no clear insight into the size of China’s buying.”

“…”Everybody in the gold market knew there was a surge in investment demand, but they didn’t know it was China,” said Jeff Christian, managing director of CPM Group.”

Of course, since China is the world’s single largest holder of US dollars (among other fiat holdings), it is only prudent for them to own a massive amount of elemental currency-value insurance. And that element is gold.

Money manager Matthew McLennan of First Eagle Investment Management sums it up, as he is quoted in Lawrence C. Strauss’ interview entitled “Making the Best of ‘The Least Worst Choice’” in Barrons 12/6/10 edition:

“Gold for us has been a source of ballast, if you will. We view it as nature’s currency that can’t be printed and, thus, its value tends to go up at times when faith in the current monetary architecture is lowest. And its value tends to go down, as it did in the late 1990s, when faith in that architecture was higher.”

This is the story that gold, the anti-fiat currency, is telling us via its daily price discovery. The further we go down the road of monetary creation, the more challenges we find to our ‘faith in the current monetary architecture.’

The vast majority of investors today tend to ignore the prospects of future inflation, thinking that we’re all in this ‘dollar boat’ together, so why worry? They do not seek absolute returns, but rather measure their investments by the number of dollars those investments produce or will produce over time.

In short, they are content with what Paul Brodsky of investment fund QB Partners, calls ‘relative-nominal returns.’ By ignoring the prospective future value of today’s currencies, these investors are content with relative returns (more units of 'money'), rather than absolute returns (more buying power).

Should they be interested enough to go back and track their change in wealth over the past few years not in terms of dollars, but in ounces of gold that those dollars would buy, they too would experience a revelation, one that would likely alter their ‘faith in the current monetary architecture.’

But for most US investors so far, the ownership of what Mr. Brodsky calls ‘inert rocks’ is not even on their radar.

 

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