Commodity Trade Mantra

China’s Gold Hoard Will Slay the Mighty Dollar — Here’s Why

China’s Gold Hoard Will Slay the Mighty Dollar — Here’s Why

China’s Gold Hoard Will Slay the Mighty Dollar — Here’s Why

Tiger Woods in his prime wasn’t close to being invincible. He was invincible.

From the time Tiger Woods burst onto the golf scene by dominating the 1997 Masters until he won the 2008 U.S. Open on a broken leg, he played golf at a level that we may never see from anyone again.

I had a front-row seat to that 2008 U.S. Open victory. I was underneath the grandstand, peering through legs trying to get a look at Tiger on Sunday as he nailed yet another epic clutch putt to force a playoff that he would ultimately win.

The crowd reaction was so loud I thought that the grandstand was coming down on top of me.

If you had told me on that Sunday that the 2008 U.S. Open would be the last major Tiger would win, I would have laughed at you. Now, with his game in complete disarray and a body that is constantly broken, I think that it probably was his last hurrah.

Tiger Woods in 2008 reminds me of the U.S. dollar today…

With European and Japanese central banks doing everything possible (and then some) to weaken their respective currencies and the U.S. Fed actually discussing rate hikes, it seems impossible to imagine the U.S. dollar being anything but strong. Seemingly invincible.

But just as Tiger had issues already going on behind the scenes in 2008 with his swing and personal life, so too are cards being played that will ultimately weaken the U.S. dollar.

Today, we’ll take a look at China’s ambition to uproot the global currency market. Let’s start by talking gold…

Nobody Knows Just How Much Gold China Actually Now Controls

It is amazing what you can find out today on the Internet.

I use it to fix my car. There are wonderful instructional videos on YouTube available for free.

I use it to diagnose what is wrong with myself and family members. Don’t get me started on the dangers of using the Internet for medical purposes versus simply taking the word of a doctor.

And I can use it to find virtually every single piece of financial data that I ever want.

There is one thing that I can’t find on the Internet, no matter how much time I spend searching.

How much gold China has in its reserves.

I can’t do that because China hasn’t released an updated gold reserve figure since 2009.

In 2009, the People’s Bank of China announced that it had significantly increased its holdings of gold from its last update, in 2003. In 2003, the gold in reserve stood at 600 tonnes. In 2009, it jumped 76%, bringing the total to 1,054.1 tonnes.

Despite the big increase, China, as of that 2009 update, had only a fraction of the gold reserves of the United States. China also had less gold than Germany, the IMF, Italy and France.

The next update from the People’s Bank is widely anticipated to significantly change that — and all signs point to the announcement coming sometime this year.

A report from Bloomberg Intelligence suggests that as of today, China’s gold reserves exceed 3,510 tonnes, which is three times the figure reported in 2009. That would give China the second largest gold reserve, next to the United States.

There’s reason to believe, however, that China could have even more gold than Bloomberg suggests.

Why Is China Stockpiling So Much Gold?

It isn’t hard to see why China would be interested in buying gold. The country has an almost-hard-to-comprehend $4 trillion sitting in its foreign currency reserves. Having all of those assets tied up in paper currencies has to be an uneasy feeling with central banks everywhere doing their very best to devalue those currencies.

What I find shocking is how much gold China could stockpile if it were really intent on doing so. The value of China’s gold reserves as of the 2009 update is only 1% of the value of its foreign currency reserves.

China could triple its gold reserves and hardly make a dent in its foreign currency reserves. The only real governor of the rate that China could stockpile gold is having to be careful not to disrupt the gold market.

With all of that cash just sitting there waiting to have its value eroded by global easy-money policy, it is no wonder China is interested in owning hard assets.

There is another reason for its growing gold hoard. China is on record calling for a new currency to replace the U.S. dollar as the global standard.

If China is looking to throw its hat into the ring with an alternative reserve currency, it is clearly a good idea to have assets other than currencies on its balance sheet. Building up a big store of value in the form of a gold reserve of global scale is an obvious move.

Now, what happens to the U.S. dollar if China does succeed in creating a gold-backed currency that gains acceptance as the global reserve currency?

Well, let’s think about that for a minute.

Globally, central banks hold far more in U.S. dollars and dollar-dominated investments than all other currencies combined. The International Monetary Fund believes that 63% of central bank reserves are held in American dollars.

They do this because U.S. dollar reserves stabilize the value of their own currencies.

But what if we soon see another option on the market? Namely, a gold-backed yuan? If all of a sudden there is a better option, there will be a huge decrease in demand for the greenback from these central banks, which will then release dollars by the bucket load into the market.

We could be looking at a systematic reset of the world’s currency regime. A simple announcement out of China or the IMF could put huge pressure on the value of the dollar, leading toward a permanent reduction in demand for greenbacks.

The Mystery May Be Revealed in the Coming Months

China has no set schedule for updating the market on the level of its gold reserves. However, there is reason to think we may get to see what is behind the curtain this year.

Bloomberg also suggested that China is soon going to want to disclose its gold holdings in an effort to have the yuan join the IMF’s currency basket, called the special drawing right. Current membership privileges to the SDR belong to only the dollar, euro, yen and British pound.

If China’s gold reserve is revealed this year and the size of the addition surprises to the upside, it is going to be a major shot across the bow of the U.S. dollar.

In fact, it might be a lot more than that. It may be a direct hit.

Keep looking through the windshield.



Courtesy: Jody Chudley for The Daily Reckoning

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