Gold and the rise of China
Fading currencies buoy bullion
Planet Wall Street
May 19, 2009
THIS is a world made for gold, already the investment success story of the millennium. Currencies are no longer printed but electronically created to meet the insatiable needs of central banks, yet green shoots turn brown or grow downwards.
The world's great "reserve" currency should be dropped to the reserves as it inspires the world with the confidence of that famous Melbourne reserve team — the once mighty Collingwood.
And the holders of that "reserve" — China, Russia, Japan, the Middle East — desperately grope for another club to join. That ugly concept, "decoupling", has
re-entered the vocabulary as our hopes are pinned, once again, on the miracle of rule through the communist committee. China will save us, the press announces with faint conviction, as that nation's energy usage drops again, this time by 3.7 per cent.
The US dollar has a dying fall and is watched fearfully as we await its day of reckoning. The International Monetary Fund is threatening to reduce its gold stocks but the Chinese have called its bluff, saying "come in spinner — we'll take it". They could and their "reserves" of some
$US2 trillion ($A2.7 trillion) would barely increase. By announcing what observers of the gold price have known since 2002, when gold began its remorseless rise, that they have been buying it by the hundreds of tonnes, a floor has been placed under the precious metal so now private investors and major financial houses are stepping up their buying.
Calling gold a "barbaric metal" is getting close to calling the Chinese barbarians. The same with the Japanese.
That $US900-an-ounce suppression ceiling was smashed within weeks of China making reality a formality with its announcement it had been the not very mysterious buyer.
Twice in as many years gold has broken $US1000 only to be hammered back, but this time the rise has an air of inevitability as gold grinds up, a few dollars one day and five the next, but it moves with unprecedented determination and has done so daily for a solid week. Efforts to cap it are solidly rebuffed.
Containment is the best hope for those who despair at the prospect of gold's growth (most economists and central banks) and even the latter in Europe are rumoured to be lining up for the stuff. Inability to buy physical gold has fast attained urban legend status and, in the US, gold shows are no shows. The shelves are bare.
But the gold bugs are smiling. The investment has been, since 2002, extremely successful. After a decade of suffering sneers, they are the ones sitting on a most considerable fortune. And their holdings are not in paper but that rare and exceedingly heavy metal, a substance that will not turn to dust in their figures or ash in their mouths.
China's announcement a month ago that it had "taken the golden path" coincided with the drumbeat of announcements that the financial crisis was past, and while gold's rise has been characteristically subdued, the sharemarket, at least until last week, had been exuberant.
"China, true to its reputation for patience and steady, long-term progress toward its goals, has taken the golden path and now they want the world to know about it," said Michael Kosares, president of Centennial Precious Metals, when China announced it had become the fifth-largest individual country holder of the precious metal.
And, as Kosares pointed out, it didn't just announce its gold accumulation. It also asked the IMF to sell its entire 2918-tonne reserve. (See Bloomberg May 1.)
And why would China encourage sales that could potentially depress the price of the gold it just bought a lot of? So it can buy more, said Peter Grandich, a metals writer at Agoracom.
But the red rag to the IMF's bull (and I use that word as befits fertiliser) is the promise to take
this "relic" off the hands of the Monetary "Fund", as it is laughingly called, for the IMF has been threatening to flog its gold since the cows began coming home.
China's "put up or shut up" to the IMF is exquisitely ironical. Contained in calling the IMF's bluff to sell gold is a wider rejection of the IMF as an institution that can bore into nations' affairs and "correct" whatever the world bankers feel needs correcting. Asia is still smarting from their last attempt — led by that sage Timmy Geithner — to resolve Asia's "crisis" during the 1990s, and China is slowly working to advance its own financial arrangement regionally.
Now the fuse is lit, and while the explosion may take time coming, time is something China and the gold buffs feel is strongly on their side.
David Hirst is a journalist, documentary maker, financial consultant and investor. His column, Planet Wall Street, is syndicated by News Bites, a Melbourne-based sharemarket and business news publisher.
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