China's Pressing Need to Buy Gold
posted on
Dec 30, 2009 07:39AM
In territorial area…in total population China dwarfs all others. Furthermore, China's economic growth - whether measured in annual percent increase in GNP or in absolute total dollar growth is second to none. To be sure the Sino country's export trade (and resulting Trade Surplus) is the envy of its global competitors. Unfortunately, China's exponential growth in Foreign Reserves has fostered a serious problem.
SERIOUS FOREX RISK
China's export trade machine has 'invaded' all countries, especially the USA. This resulted in building up a mountain of Foreign Reserves, denominated mostly in US Dollars. Recent data show China has upwards of $2,273 Billion in Foreign Reserves with about 70% denominated in US dollar (*).
Unfortunately, The Peoples Bank of China did not have the foresight to diversity its mounting Foreign Reserves into other currencies like the euro, yen and gold. Consequently, China will suffer a horrific loss in 2009. The loss is composed in two parts: 1)Dollar devaluation, and 2)Price decline of US Treasuries as most of its Foreign Reserves are in this investment vehicle….rather than gold. The following chart clearly demonstrates the relative total return of the US Dollar, US Treasuries and gold during 2009. As of December 29, 2009):
DIRE NEED TO DIVERSITY ITS FOREIGN RESERVES
It is painfully obvious China has a pressing need to diversify its ever mounting Foreign Reserves derived from its perennial Trade surplus. This begs the question, how much gold does China need relative to its gargantuan level of Foreign Reserves? To objectively answer this, it is necessary to compare China's positions to that of other highly industrialized countries - like the USA, GERMANY, ITALY and FRANCE.
Presently, China has 27 TIMES MORE the total Foreign Reserves of the USA. In fact China has more than 4 TIMES the total Foreign Reserves of USA, Germany, Italy and France, combined !! Here's the data for each:
China is truly the Goliath of Total Foreign Reserves.
However, this Goliath has an Achilles Heel. Only a minuscule 1.5% of its Total Foreign Reserves is gold. Most of the rest is in US greenbacks. Consequently, China is subject to and a slave of the vagaries of the US dollar.
To appreciate the severity of China's FOREX risk, one must compare gold foreign reserves coverage prudently held by the other well developed countries. Namely, what percent of their Total Foreign Reserves are in gold. The following is self-explanatory.
Clearly, China is grossly if not obscenely deficient in diversifying its pernicious US dollar reserves into traditional value storage gold. But what might be a prudent gold diversification for The Peoples Bank of China?
The above four major industrialize countries hold a prudent 65% of their Total Foreign Reserves in gold. If one assumes China may soon recognize the sensible merits of gold's risk diversification, The Peoples Bank of China would need to buy an additional 44,619 tonnes of the shiny yellow. It is imperative to put this quantity into perspective by comparing it to two bench marks:
China's gold deficit represents 27% of the total existing above ground gold (166,000). Furthermore, if China were to buy up all newly mined gold in the world, it would take 18 years to accumulate 44,619 tonnes.
CONCLUSIONS
It is imperative to appreciate past results is no guarantee of future performance. However, I am convinced future relative performance may be a mirror image of the past nine years. My steadfast conviction is based on the following:
ERGO, there will NEVER be peak gold price.
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Data Sources (*):
Total Reserves by Country
http://en.wikipedia.org/wiki/List_of_countries_by_foreign_exchange_reserves
Gold Reserves by Country
http://en.wikipedia.org/wiki/Official_gold_reserves
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