Once again, Wikileaks gives us an insight into areas most politicians would prefer stay hidden.
Here is an excerpt from a cable published by Wikileaks, and sent from the US Embassy in Beijing in April, 2009:
3. CHINA’S GOLD RESERVES
“China increases its gold reserves in order to kill two birds with one stone”
“The China Radio International sponsored newspaper World News Journal (Shijie Xinwenbao)(04/28): “According to China’s National Foreign Exchanges Administration China ‘s gold reserves have recently increased. Currently, the majority of its gold reserves have been located in the U.S. and European countries. The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold’s function as an international reserve currency. They don’t want to see other countries turning to gold reserves instead of the U.S. dollar or Euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar’s role as the international reserve currency. China’s increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB.”
So this is why China has been buying gold.
In one way, this is hardly surprising. The US holds a unique position for as long as the dollar is accepted as the world’s reserve currency. Much of the world’s trade is conducted in US dollars. Gold is priced in US dollars. Other currencies are priced in relation to the dollar.
And if the dollar were not the world’s reserve currency, the US Treasury wouldn’t be able to keep printing dollars as if there were no tomorrow.
But there is a tomorrow, and China is acutely aware of this.
China holds over 3 trillion US dollars. The Chinese are acutely aware that if the value of the dollar falls, so will the value of their holdings.
So now they seem to be following a very delicate path. On the one hand, they don’t want to devalue the dollar, because they have so many of them. But on the other, they want to protect themselves in the years ahead. Hence their interest in turning to gold as an alternative to the dollar.
It’s also interesting to see their assertion that the US and European countries are deliberately trying to suppress the price of gold, so that it doesn’t become an attractive alternative to the dollar.
Now it’s time to ask ourselves some tough questions:
What if China continues to use its $3 trillion to keep buying gold?
What if other countries follow China’s example?
What if the world’s pension fund managers – with over $31.1 trillion in assets – decide to buy more gold? (A typical pension fund holds only about 0.15% of its assets in gold.)
As you think about these questions, keep in mind that global gold production is past its peak and is now falling.
In other words, against a background of falling supplies, we could soon see a huge increase in demand.
And that means higher gold prices.
Yes, we have seen some corrections in gold prices recently. But don’t lose sight of the big picture. It’s still a great time to buy gold. And maybe an urgent time to by gold.
Further reading…