China isn’t about to let the gold market stand in the way of its quest to have the renminbi dominate global trade. The problem is that China still needs a mountain or two of gold to give its currency the indisputable strength it must have.
China’s domestic production saw a respectable increase in the first two months of 2012 of 8% over last year, but that’s still a drop in the proverbial bucket. If they tried to fill the bucket with imports they’d send the gold price through the ceiling, and China is not likely to shoot itself in the foot.
The biggest mistake the western world can make in regards to China is to underestimate the country’s savvy and its resolve to meet its goals. But we have been consistently doing just that for more than three decades now.
One way China has been able to purchase physical gold without unduly upsetting the gold market is through the use of proxies, such as Sovereign Wealth Funds, which shield the transactions from the close scrutiny given central banks. But even stealth trades have their limits.
It’s no secret that for years China has been methodically trading in its dollar-based assets for anything and everything of tangible value. Their acquisition of foreign capital has become so commonplace that it now attracts very little interest. But it should.
What better way can there be to buy gold well below market than to buy its sources? China is doing precisely that through acquisition of gold mines.
The risk is minimal because the rising cost of extracting gold is far eclipsed by rising gold prices. In essence that allowed China to buy gold for well under $700 per ounce last year without sending a ripple through the market.
Although China’s sly sidestepping of the market may not seem so at first glance, it bodes well for the future of gold. Unlike every single western nation China is not myopic. She thinks in the long term and plans accordingly.
China is buying gold mines because it believes in the persistent value of gold. If it didn’t, buying the source of gold would make no sense.
Eventually the gold market will wake up to the gambit, but by then China’s coup will be complete. Here at home, each of us is left to face a decision.
Shall we ride China’s coattails to riches or stubbornly adhere to prideful faith in the almighty dollar?