Topic: Gold and Silver
The Gold War - China and the US Treasury Market "Except for U.S. Treasuries, what can you hold? Gold?" - Leading Chinese central banker, February 2009by Jake Towne, the Champion of the Constitution
(libertarian)
Tuesday, May 5, 2009
NEW YORK CITY, FEBRUARY 11, 2009 - Luo Ping, director-general at the China Banking Regulatory Commission, gave what may be a landmark quote in the years to come ahead. Besides chastising the United States for its "laissez-faire capitalism" - at which point I distinctly remember choking on my breakfast of delicious jiaozi (I was in Shanghai eating Chinese dumplings) since Ping obviously understands that corporate cronyism is NOT laissez-faire capitalism as fellow columnist Steven McDuffie recently reminds - in retrospect another part of his speech may prove to be the most prophetic. From Reuters:
"Except for US Treasuries, what can you hold? Gold? You don't hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option."
As I related in "China Nearly Doubles its Official Gold Reserves", China revised its official gold holding from 600 tons in 2003 to 1,054 tons last month. However, the very fact that China reported no increase for 6 years and then suddenly doubled should prove one thing - the Chinese are abiding by the IMF Articles of Agreement only as it pleases them. For instance, the state-owned banks can hold as much gold as they wish without reporting, although this gold is de facto the Chinese government's. Please understand that subtlety, not brazen statements like Bush's sad "Mission Accomplished" ceremony or Obama's 100 Days congratulation party, is the Chinese way.
"US Treasuries are the safe haven... the only option."
Really? Although March and April data are not available, you could have fooled me! For perspective, the size of the US Treasury market was $10,700,000,000,000 in December 2008. Of this, $727 billion, or 6.8%, belongs to China, and close to one-third is foreign-owned. (Although some would argue that the $4.8 Trillion owned by the Federal Reserve is foreign-owned as well, in actuality this interest is mostly returned to the Treasury as described here "The Federal Reserve - A Good Company to Work For?.") See the chart below (source www.treas.gov).
In February, the Obama stimulus plan was passed and planned to be paid - in the future - by US Treasury securities. Now, if the Chinese really believed what they said, in these troubled economic times their cash-rich hands would have been scooping up this "safe haven" like candy. However, in February the amount of US Treasuries in circulation was $11.1 Trillion, while the Chinese "only" increased their holdings by $4.6 Billion, slightly dropping their percent ownership of our country to 6.7%. Upon closer inspection, the rate of decrease in China's Treasury purchases is alarming. From a 53% increase in 2008, the 3-month annualized ratio fell to just 9%. The 1-month non-annualized increase was a meager 0.7%.
(All data for above plots is available from treas.gov here or I can send my Excel file via email request)
As can be seen, Caribbean Banking Centers (aka "smart money") and Oil Exporters (Saudi Arabia and the Middle East, as well as Venezuela) are actually net sellers at the moment. From the data collected, I believe it will be very wise to keep an eye on the levels reported for March and April.
However, both Congress, the FED and Treasury can view at least the March data right now. Representative Mark Kirk (R-IL), a member of the House Appropriations Committee and co-chair of a group of lawmakers promoting relations with Beijing, stated last week:
"It would appear, quietly and with deference and politeness, that China has canceled America's credit card... I'm not sure too many people on Capitol Hill realize that this is now happening."
10-year Treasury yields yesterday hit 3.2%, a 6-month high, which is also an indicator demand may have dried up. The FED bought $8.5 billion, and the Treasury plans to offer another $71 billion this week at auction.
"Except for US Treasuries, what can you hold? Gold?"
The answer to this question is, of course, a strong YES!As the Gold Anti-Trust Action Committee (GATA) revealed, the commonly-accepted World Gold Council and GFMS gold holding data have been proven incorrect as they have failed to track the unannounced Chinese accumulations. Since 2003, GATA has surmised that China has been adding continuously to its holdings and offers proof that the gold price has been suppressed here.
As the integrity of the US banking system is compromised, private citizens should consider becoming their own central banks. The days of irredeemable paper fiat currencies may be approaching its end, and there is a reason why the central banks hold gold - it is their default insurance.
Do not be fooled, the gold reserves of central banks are their actual Money. Debt-based paper dollars, yen, pounds are all just ridiculous currencies, sad shadowy mirrors of their former selves, which is gold and silver coin. Gold's manipulated volatility cannot mask its >16% annualized returns versus the USD over the past 8 years. Remember - in actuality, it is the depreciation of the world's fiat currencies we are seeing, not the appreciation of gold itself which is itself both money and a currency as I explained here "Silver and Gold ARE Money (PART 1/2)".
Who will win the Gold War? The simplest answer also holds the most truth. Over the past five thousand years, the winners are those who are holding the gold at the war's end.
The author would like to thank Mr. Wolkow of the US Department of Treasury for his prompt and accurate replies (less than 1 business day) to my email questions.
We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.
As always, unlike the NFL, the author grants full permission to allow any accounts of, rebroadcasts, retransmissions, repostings in part or full of this article to your blog or anywhere else in order to promote the Restoration of our Republic.
Veritas numquam perit. Veritas odit moras. Veritas vincit. Truth never perishes. Truth hates delay. Truth conquers.
Tu ne cede malis sed contra audentior ito. Do not give in to evil but proceed ever more boldly against it.
The views expressed in this
article are those of Jake Towne, the Champion of the Constitution only and do not represent
the views of Nolan Chart, LLC or its affiliates. Jake Towne, the Champion of the Constitution is
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employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.
good article. A question I still have that you may have an inside line on is "why would the Chinese not invest in Chinese securities?". when I last checked, their central bank rate had just been "lowered" to 7%. Is their currency that much worse than ours that the exchange rate makes up for the difference?
I would be very interested in what you think about my next article. It is certainly not an opposite view, but it brings up an issue with gold conversion.
Posted By: Jake, the Champion of the Constitution
Date: 2009-05-05 09:17:30
Dear gene -
Umm, I wont claim to be an expert on Chinese monetary policy as I focus on the US's, so my answer might be dead wrong, but that wont stop me from taking a stab at it!
As far as their currency being "much worse" than ours, the yuan is still pegged to the dollar - although Beijing can change it tomorrow if they really want to - there are still adverse effects while the US is the major trading partner. If you google Eric deCarbonnel, some of his writings are quite interesting.
In terms of purchasing power, for $4 USD I could buy an insane amount of fresh food from the countryside, even in a major metro center like Shanghai - (20 eggs, 1 KG of tofu, 1 lbs carrot, 4 cloves garlic, and 1 lb of greens, 1.5 lbs sweet potatoes was my last purchase in March)
As to your question "why would the Chinese not invest in Chinese securities?" it appears that the last numbers on "Chinese Treasuries"/bond issuances in 2004 was just $161 billion. On page 10 of the 2008 Q4 report, central bank bills were reported as 4.65 trillion yuan or "just" 680 billion. The market size looks fairly small to me,and my speculation is that placing large amounts into yuan is certainly subject to whether the central bank wants them to buy it. I may be wrong, but internationally freely trading Chinese debt seems a bit weird to me as this would have adverse effects on the FOREX rates.
Now the Chinese have this market just so they can do Open Market Ops, just like their predecessor, the FED. It wouldnt surprise me in the least to find that this market is controlled tightly, as in as tight as a drum.
Its kinda funny in a way - why would China really even want to issue their debt to foreigners? Free purchasing power I suppose, but how does it serve the people except by placing them into bondage? In US history, one of Alexander Hamilton's curses was this bloody debt to foreign money powers. To me, the bonds should just be issued during necessary times, like to finance a (just and declared) war.
In today's world, we equate the ready conversion of gov't debt into debt currency. In fact, FRN's or dollars are SECURED by the US Treasuries or public debt. Crazy situation if you think about it too much, but my point is there is certainly a big difference in being in debt to foreign powers and in being in debt domestically... the miracle of compound interest indeed... I am sure China is well aware of this.
Really, it is central banks that complicate the whole capital issue. To me, with a strong, emerging producer like China, with a billion people and so much to be done, it is hard to imagine a "dollar" of capital ever leaving Asia under a free system [which of course is only theory].
really what established the economic dominance of this country was high production and capital returned directly back into production during the fifties and sixties. but we already had a hundred years of infrastructure, which may be a big difference.
Another great article Jake! I'm impressed with all the statistics that you continuously dig up for your research. Thanks for keeping the passion alive!
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As can be seen, Caribbean Banking Centers (aka "smart money") and Oil Exporters (Saudi Arabia and the Middle East, as well as Venezuela) are actually net sellers at the moment. From the data collected, I believe it will be very wise to keep an eye on the levels reported for March and April.