Monday, September 7, 2009

China and her dollar holdings.

China, Bernanke, and the price of gold

China has issued what amounts to the “Beijing Put” on gold. You can make a lot of money, but you really can’t lose. I happened to see quite a bit of Cheng Siwei at the Ambrosetti Workshop, a gathering of politicians and global strategists at Lake Como, including a dinner at Villa d’Este last night at which he listened very attentively as a number of American guests tore President Obama’s economic and health policy to shreds.

Posted by flintster1994 @ 08:28 AM (848 views)
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4 thoughts on “China and her dollar holdings.

  • UK Debt Slave ( on Sep 7th, 2009 at 8:54 am ) makes a good comment

    One point I would differ on is where (s)he says, “All those complicated equations and formulae that ‘economists’ use to centrally plan economies are nonsense, but they need all of this flannel to disguise a totally disfunctional system.”, I would say that the formulae make perfect sense whilst one is within this system, it’s just that other systems with less centralised power structures are perfectly possible.

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  • The Chinese have a fundamental problem with the value of their Forex – it can only depreciate, whatever they do, and whatever form they keep it in.

    The export drive breathed life into the Chinese economy, but Ambrose is wrong to assume that the Chinese must continue to run a trade surplus indefinitely. To do so would be to repeat the mistakes of Japan.

    China needs to ease back on its trade surplus, although that will not be easy. Margins are not as thin as Ambrose suggests, and many Chinese made products could rise dramatically in price before buyers were persuaded to look elsewhere.

    By increasing the value of the yuan, imports will become cheaper for the Chinese people, and eventually some manufacturing (especially of products that have a low value, relative to their bulk) will return to the importing nations. However, in the short term, the higher price demanded for their products would actually serve to increase the inflow of forex.

    It is not clever for any nation to have either a persistant trade deficit or persistant surplus. Deficit nations are eventually compelled to inflate their way out of the problem of accumulated debt, while nations in surplus fume at the devaluation of their assets.

    Gold is a fickle friend for the Chinese. They might elect to play the market, by intervening to buy whenever the price drops below a certain level – but where does that ultimately leave them? If they subsequently attempted to sell their holdings, the price would collapse, leaving them nursing a heavy loss. An investment is only worth what you can sell it for, not what you paid for it..

    Better for the Chinese to buy into commodities that have a relatively short lifespan, and the companies that produce those commodities.

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  • UT – too right. Typical resistance to change or to the need to change. Although, to be fair, there has been resistance to their recent spree in the mall of commodities producers and processors, so is the wealth just being earmarked and stored? ( in which case gold is a relatively good choice for it’s correlation with other commodities, yet without exposing their hand – China, a naïve capitalist agent I think not! )

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  • 666,

    China has less than 1% of their forex in gold, so they’re not exactly piling in..

    Suppose the US, which has around 8,000 tons of gold, attempted to offload just 5% of their holdings, but in fairly short order. There is a very good chance that by doing so, the price would plummet to $500 or less. In other words, the nominal value of the US reserves cannot readily be realised.

    Suppose the US decided to play the market, feeding in small quantities when the price was $950, and at the same time the Chinese played the same game, buying when the price was $950.

    Over time, the US gold reserves would gradually transfer to Chinese ownership – but who would be the winner?

    The US would have sold their reserves for a good price, while the Chinese would be left with an asset that no-one can afford to buy.

    US – 1
    China – 0

    As you say, the Chinese are not naive..

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