Another analysis suggesting that China is the gorilla in the perennial battle of parties looking for advantage in the forces controlling the direction of the gold price.
Author: Lawrence Williams
Posted: Tuesday , 04 May 2010
LONDON - Once again I am indebted to Paul Mylchreest's absorbing irregular letter, the Thunder Road Report for some extremely interesting insights into global financial and gold policy and where that is likely to lead us in the future.
In his latest letter, Mylchreest reckons we are now in the ‘Third Gold War' since the Second World War and this is being waged between the USA in conjunction with other western countries/institutions, notably the IMF, and various opposing sectors worldwide. In his contention, the U.S. and its allies lost the first of these ‘gold wars' to the French (then under De Gaulle) and the second to the Middle East, helped significantly by the then pro-gold stance and purchasing power of the German Deutsche Bank.
This latest Gold War has been/is being fought covertly. "High profile sales of physical gold have, for the most part, been replaced by sales of "paper gold" in the form of futures, OTC options and unallocated gold, etc." asserts Mylchreest. But this time he reckons the veil has been lifted and the whole charade is beginning to unravel. Instead of France or Arab nations, the opponent this time is China - the 800 pound gorilla - potentially an even more formidable opponent, with a huge treasury of trillions of dollars with which to back its moves. It's not just that it is the Chinese government which is the major participant, but also now that gold and silver ownership is being promoted to the populace there by government institutions, there is the huge pent-up, and growing interest in precious metals of the rapidly increasing Chinese middle class and its potential to affect the global demand patterns.
So how is the ‘war' being fought covertly - on the one side by keeping the market off-balance avers Mylchreest. Intervention to prevent sharp upwards price movements which can cause continual price corrections and this can shake out weak holders. The ‘war' is also being fought largely with paper gold rather than physical gold using futures and options.
But, on the counter-side the opponents may also be acting just as covertly in some areas. China is widely seen to be buying on any price dips, but hiding any increase in gold reserves achieved in this manner by moving it into an account which it doesn't have to report to the IMF as an official gold reserve. It may be recalled that only a year ago China did announce a built-up reserve position which it had effectively been doing surreptitiously for the prior six years.
"It's important to realise here" says Mylchreest, " that in this gold war, the US authorities are taking on both the Chinese state AND its citizens and we need to consider both. In recent months, the only illuminating information about gold to come from an "official" Chinese source was reported by Ambrose Evans-Pritchard on his Daily Telegraph blog. His story "Gold now enjoys the Beijing put" followed a meeting with Cheng Siwei, China's former Vice Chairman of the Party's Standing Committee and now a "sort of economic ambassador for China around the world". On his blog, Evans-Pritchard commented:
"What he said about US monetary policy and gold - this bit on the record - would appear to validate the long-held belief of gold bugs that China has fundamentally lost confidence in the US dollar and is going to shift to a partial gold standard through reserve accumulation. He played down other metals such as copper, saying that they could not double as a proxy currency or store of wealth. ‘Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not stimulate the market,' he said. In other words, China is buying the dips, and will continue to do so as a systematic policy...As I have written in today's paper, Mr Cheng (and Beijing) takes a dim view of Ben Bernanke's monetary experiments at the Federal Reserve. ‘If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies,' he said."
"The theory that China is "buying the dips" also fits with the market action we are seeing" says Mylchreest, as it seems to the writer does the suggestion that there is greater selling pressure from the U.S. whenever there is a sharp increase in the price - as witness today (Tuesday) when a sharp upwards movement was almost immediately countered by an even more severe downdip.
But then while China may be the leading opponent to the ‘keep the gold price down' policy there are other countries too which have expressed their interest in increasing their gold reserves - notably Russia and India - but like the Chinese they also have a vested interest for the moment - and maybe for some time to come - in achieving this aim without seeing the dollar dive too far too fast given that, like nearly all other nations, the bulk of their reserves is in dollar-related bonds.
But as Cheng noted in his meeting with Evans-Pritchard, ultimately the dollar will come ‘crashing down' - as may the other western reserve currencies - the Euro and sterling - with the Eurozone and the UK having been almost as profligate as the U.S. in attempting to money-print their way out of recession - and the Eurozone has specific problems of its own relating to the economic travails of some of its weaker members.
And what of silver - the Chinese appear to have been equally assiduous in promoting silver sales to the people - perhaps to those who feel they can't yet afford gold. Interestingly the promotion of silver occurred shortly after China banned the export of the metal in early 2009.
Whatever the truth of some of the speculation - if indeed the gold price is being manipulated on the one side by the U.S. and its allies, and on the other by the Chinese among others - there is also the perception that perhaps the elements of this which may be trying to suppress gold and silver price growth may be breaking down and gold may become freer to move in line with market forces wherever that may take us.
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