China’s Gold Imports Rising

[courtesy Google Images]

70 tons and 71 tons40% more gold than the world produces

This tells us that China’s most recent rate of imports can’t be sustained—and leaves us wondering why are they ramping up imports just now?  Have they decided to dump some of their dollars?  Do they expect the price of gold is about to rise significantly, so they’re buying all the “cheap” gold they can acquire?

At the buying rampage seen in the last half of January, China’s purchases of gold might be described as almost desperate.

Does China know something is about to happen that will cause gold to become increasingly scarce and valuable?

•  In the last two weeks of January, China imported six times more gold than the COMEX claims to have as deliverable inventory!

If China’s appetite for gold remains as insatiable as seen by purchasing 70 tons a week for the last two weeks of January, we can suppose the world markets may soon be almost devoid of gold and China may therefore decide to raid COMEX in order to acquire whatever gold remains in the COMEX vaults.

In theory, at the most recent buying rates, China could destroy COMEX by simply demanding to take delivery of COMEX physical gold for three days.

This suggests that the COMEX gold market could soon be relegated to extinction as they may have no product available for delivery.

But will China actually destroy COMEX?

Probably not.

Why?

Because COMEX doesn’t really have much gold for for China to seize.  But COMEX still performs the vital function of suppressing the price of gold on a global scale that helps China to purchase 70 tons of gold per week at irrationally low prices.  So long as COMEX paper-gold can help hold down the price of physical gold, COMEX is helping China.  China will not attack any entity that, on balance, helps China.

China has a vested interest in allowing COMEX to survive, so China will not destroy COMEX and seize whatever gold remains in COMEX, until COMEX can no longer serve China’s interests.  If COMEX loses its ability to suppress the price of gold, China will jump into the COMEX market and try to capture whatever gold remains. But, so long as COMEX paper-gold can and does suppress the world price of physical gold, China’s policy towards COMEX should be “hands off!”

•  In the meantime, a “two tier market” might develop wherein we see large down days on the COMEX price of paper-gold at the same time we see huge up days in the prices of physical gold as traders begin to recognize the true dichotomy between paper gold and physical gold.

If we do, COMEX’s days should be numbered.  Once COMEX fails to suppress the price of physical gold, China should jump into COMEX and seize whatever scraps of gold are still in the COMEX vault.

But, what’s that dichotomy between paper- and physical-gold?

It’s this:  Paper gold is nothing but a “promise to pay”.  Physical gold is an actual payment.

Do you want to work for promises?  Or do you want to work for payments?

Do you want to be paid in promises?  Or do you want to be paid in payments?

Do you want to invest in “promises to pay”?  Or do you want to invest in “payments”?

Once you begin view your investments in terms of “promises to pay” vs. “payments,” your investing choices can be significantly simplified—and you should begin to see clearly why physical gold is vastly superior to paper gold.

•  What might it be that China thinks is “about to happen” to cause China to purchase so much gold?

Maybe it’s a sovereign debt “reset” where some or all of the world’s governments simply agree to cancel some or all of their existing “national debts”.

Over the past 8 months, the dollar’s purchasing power rose almost 20% as measured on the USDX.  That rise is evidence of deflation.

Deflation is anathema to debtors since it compels them to repay their debts with more valuable dollars and thus drives debtors towards bankruptcy and economies towards depression.

The US government is the world’s biggest debtor.  As such, the US government has the world’s most powerful interest in causing inflation and preventing deflation.  Nevertheless, the US government has allowed deflation to manifest itself on the USDX over the past 8 months and made no significant effort to stop that deflation.

Yes, the dollar has fallen significantly on the USDX over the past week. But it remains to be seen if that one-week fall is a temporary aberration or correction that will soon give way to the previous 8-months-long bull market for dollars.

While we wait for more data, government’s 8-month long failure to stop USDX deflation seems incomprehensible since deflation actually increases the value (purchasing power) of the national debt.  Deflation makes the debt bigger.  Why would a government that’s already unable to pay the national debt, effectively allow that debt to grow even larger?

The only way that government’s failure to prevent USDX deflation makes sense to me is if the government knows that it will soon repudiate some or all of the national debt.  If the national debt is about to be repudiated, deflation makes no difference.

•  Q:  What difference does it make to any debtors if the dollar’s value is rising or falling—if his debt is about to be repudiated?

A:  None.

Suppose I owed you $1,000.  If I’m going to repudiate that debt, what difference does it make if those thousand dollars are each valued at ten cents or at one ounce of gold?  If my debt is about to be cancelled, the value of each dollar is irrelevant.

Government’s seeming tolerance for deflation seems incomprehensible only if we assume that our overly-indebted government still intends to try to repay its national debt.

But if the government has already decided to cancel the debt, deflation is irrelevant.

•  IF it were true that the US government planned to repudiate its debt before, say, the end of A.D. 2015–would the US government act unilaterally? Or would the government act in concert with rest of the world’s debtor-governments to cause a “sovereign debt default”?

I doubt that the US would act unilaterally.  I’d bet other nations would also cancel their debts at the same time in a “global reset”.

I’m not predicting that a “global sovereign debt reset” is about to take place.  But I am saying that that’s the only scenario I can currently imagine that would justify our government’s apparent willingness to tolerate deflation.

•  If China knew or believed that such a “global sovereign debt default” was imminent, China would know that all of the fiat dollars (which are nothing but paper promises to pay) that are stored in China’s treasury would soon be worthless. If so, it would be incumbent on China to convert as many of its fiat dollars (promises to pay) into “payments” (gold) as was humanly possible.

Under that scenario, China’s recent weekly purchases of 70 and 71 tons of gold would make perfect sense.