we all know ofChina’s insatiable appetite for gold amazingly China’s foreign currency reserves can now buy the entire world’s gold supply twice over. The stunning graphic below depicts this truly astonishing fact.
The graph also depicts the combined gold reserves of India, Russia and Brazil. What is fascinating about this 10-year chart is not only the fact that China can buy the entire world’s gold reserves twice over, but also to see the explosion in China’s reserves. According to Bloomberg, China’s foreign currency reserves have surged more than 700% in just the last 9 years alone. This chart illustrates a key point and a very frightening one for the gold bears, that China’s demand for gold will remain insatiable for many, many years to come:
The CHART OF THE DAY shows how China’s foreign reserves surpassed the value of all official bullion holdings in January 2004 and rose to $3.3 trillion at the end of 2012, data compiled by Bloomberg show. The price of gold increased 263 percent from 2004 through Feb. 28, with the registered volume little changed, according to data based on International Monetary Fund and World Gold Council figures. By comparison, China’s reserves rose 721 percent through 2012, while the combined total among Brazil, Russia and India rose about 400 percent to $1.1 trillion
Dollars brought into China are sold to banks, which in turn sell the greenbacks to the central bank, increasing the reserves. That process has been fueled by trade, with China exceeding Germany to be the world’s largest exporter in 2009. The size of the reserves means the government can’t make major adjustments to its holdings on the open market, according to Mirae Asset Financial Group’s Joy Yang.
“China’s foreign-exchange reserves are a blessing in bad days but a curse in good days,” said Yang, Mirae’s Hong Kong– based chief Greater China economist, who has previously worked for the IMF.
About two-thirds of China’s assets are dollar-denominated and another quarter is in euros, according to Yao Wei, a Hong Kong-based economist at Societe Generale SA. China is now encouraging companies and residents to keep more foreign currency in a strategy known as “hiding foreign currencies among people,” meaning that the government’s foreign reserves may “gradually fall,” Yang said.
China’s reserve assets were 30.2 percent of the world total at the end of last year, compared with 14 percent at the start of 2004, Bloomberg data show. China’s total was about triple Japan’s, now the second-largest holder. Japan held about 23 percent of global reserves at the start of 2004.
Watch Gold & Silver As Central Planners Face Herculean Task
There was a terrible tragedy last week. A man in Florida was asleep in his bed, and a giant sinkhole caused the concrete under the bedroom to collapse, taking the man and the contents of the bedroom with it. Sadly, the authorities have given up the search for the man and the house is being bulldozed.
Sinkholes are quite common in Florida. Much of Florida lies atop limestone and dolomite. This kind of material is easily dissolved through contact with acidic water. Rainwater itself is acidic and the level of acidity is enhanced by exposure to decaying plant debris. Think swamps in particular. The process can take eons. The sinkhole that took the man’s life could have begun millions of years ago. In many instances, this geologic process can create underground rivers and structures of great beauty. Not so in this recent tragedy.
This tragedy brought to mind an image of a financial sinkhole. Economies and markets are on paths that are obviously unsustainable to any thinking person with a modest exposure to arithmetic and history….
“The majority is focused on process and politics, yet few grasp, let alone care, about the devastating consequences ahead if we continue on our present destructive paths. Those sounding the warnings are dismissed as extreme. Our collective plan seems to be to repeat the mantra that everything is ‘OK,’ and that will make it so. For those who remember the Wizard of Oz, there are not enough ruby shoes to go around, and there is not enough room for everyone in Kansas.
Listening to the congressional testimony this week by Chairman Bernanke, it drove home the fact that the central banks have only one path left to pursue, short of a currency reboot. They face a Herculean task. Their to do list includes keeping the banking system solvent, closing the gap between government spending and government revenues through the purchase of Treasuries, keeping interest rates near the present levels, maintaining the belief that inflation is in check and suppressing any challenges to the dollar as the world’s reserve currency. We can only wonder at what the full list might include.
Since 2008, trillions were pumped into the global financial system. Interest rates were forced to near zero. Budgets were tossed aside. The effects that these policies have had are starting to wane. Economic gravity is starting to reverse the momentum that was achieved. Savings rates are plunging, economic activity, in general, is slowing. The budget deficits have been temporarily constrained but remain at levels that cannot be funded in traditional ways.
Chairman Bernanke made it quite clear that what lies ahead is more of the same. Just to maintain the status quo, trillions more of fiat currency must be created. He knows that there are only two possible outcomes. One is to keep doing it until the currencies collapse in unison, and a new financial world order emerges. The problem with that theory is the new financial system would mark the end of the dollar as the reserve currency.
China, in particular, and, perhaps with Russia, would take over that role. When you consider that each country is on their way to possessing more gold than the fiat bloc, it is not a farfetched idea. It could be highly probable. It will not mark the end of fiat. It is too good of a scheme to trade for one based on sound money. It simply means that control and the associated benefits transfer to a new bloc of countries.
So how do your take care of the monumental tasks already on your to do list, and not relinquish your role as the reserve currency? You must get all of your constituent central banks and leaders to print in unison. Thus, the only palatable option remaining is to boost gross domestic product (GDP). This is not something new. We began seeing this in 1971, and this was a likely reason why we escaped a Kondratieff Collapse in the mid-70s.
The G-20 nations recently stated that printing was going to be policy. As Chairman Bernanke testified this past week, the tools used to stabilize the system coming out of the 2008 meltdown are no longer available. Stocks and bonds were manipulated higher, and will likely continue to be so.
There is another path, and that is to unshackle people and markets. We saw it clearly in the early ’20s, early ’60s, and the early ‘ 80s in the United States under both Republicans and Democrats. Despite that record of unmistakable success, the powerful today believe that prosperity comes through printing money. It is in their DNA, and they apparently are planning on continuing full speed ahead. In American football, that is called a “Hail Mary.” We can only hope that the central bank version has a better chance of success.
Stocks and bonds are near all-time highs, yet unemployment and financial hardships abound. Human suffering is increasing at an alarming rate. It is confusing when one sees the Dow Jones Transports and Utilities are breaking out as well as other popular indexes. Is it real or just part of the narrative we are supposed to hear and see? Some of it probably is real. Most is the result of flooding the planet with liquidity.
As with the rain that causes sinkholes, this monetary rain is also acidic. It erodes the very economic foundations upon which we stand. Life must go on. There is no choice but to follow along with the financiers and their battle for supremacy. It is unnerving to know that the economic ground under our feet could collapse in a global sinkhole at any moment.
Allocations to cash and fixed income are akin to a 9-story escape ladder for a 20-story building. It feels good for only part of the journey. Investors need to focus accumulating real assets as their only hope for solid ground, particularly energy, gold and silver and related investments.”