China's immense, and growing, impact on the global gold market

There seems little doubt that China's economic strength can lead to it dominating gold price movement for the foreseeable future.

LONDON - 

There is little doubt that China nowadays has the financial muscle to effectively control the global gold price.  The mere sniff of a report that it is taking gold into its official reserves to counteract dollar decline is sufficient to, at the least, stabilise the gold price - and there seems to be little doubt that it is so doing, but at the moment in a manner that is not designed to de-stabilise the dollar or, on the other hand, not to contribute to a quantum leap in the yellow metal's valuation - yet.

But - should China wish to de-stabilise the dollar by announcing big gold purchases into its reserves to replace a good proportion of its trillions of dollars, there is also little doubt that it could do so.  It is an economic weapon which perhaps has more power than a nuclear one if it wished to bring America, and the West, to its collective economic knees through currency war.  But again that is not seen as an option - or at least not until the country's domestic market is big enough to soak up all the manufactured goods China can still sell to the West. 

Thus China is still very dependent on export markets, so revaluation of the renminbi is not seen as helpful and dollar decline has to be worrying.  So the country has to move cautiously to retain some kind of global economic equilibrium.

But noticeably, China is already exerting its financial dominance.  It has said its mostly state-owned financial organisations will have the right to default on some of the more dubious commodity and financial related derivative trades that they may have entered into.  This has only raised a muted response from those financial institutions which could be affected because it is China's financial muscle which is beginning to call the tune in world financial circles - not the mighty U.S.A. any longer.  But it could lead to more grief in western financial circles and the already stressed banking system.

Its state-owned enterprises are on a massive buying spree of western assets, both as an investment and, in the case of the mining sector, to tie down future strategic resource supplies.  In perhaps a conscious effort to allay suspicions of Chinese motives in many countries, much of this is via significant minority stakes in western companies tied to long term supply deals.

But back to gold.  We reported here that a top Chinese official virtually admitted China was buying gold, but in a way which was designed to maintain at least a reasonable degree of stability in the markets and not rock the gold boat.  If this is true, and there is little reason why it should not be so then this will effectively mean there is little or no serious downside risk in buying gold.  But China can also control the upside, as it may not wish to precipitate a big dollar collapse which would be the likely outcome of a big gold price rise.

We reported also, in an article which virtually went viral on the internet and has been picked up by many other commentators (China pushes silver and gold investment to the masses), that Chinese state organisations are selling, like soap powder, the advice to buy gold and silver to the general populace - which already has a gold purchasing psyche.  As a result China is likely to surpass India as the world's biggest precious metals purchaser this year or next.  It also lends support to the country's domestic gold mining industry - China is currently the world's largest gold producer and is a country where output is continuing to rise.  Chinese domestic gold purchases rose 14% year on year in the first half of the year to 446.6 tonnes and industry analysts expect double digit growth to continue in the curent half year, even with gold at over $1,000.

This too provides a massive underpinning of the gold price at, at least, around current levels.  It is apparent that buying has been coming in every time gold dips and the suspicion is that this is by the Chinese, but it is well enough hidden that it is difficult, if not impossible, to clearly define the source.

At the moment gold seems to be holding up well close to the $1,000 level despite the huge degree of profit taking which comes in at psychological levels like this.  The suspicion is that China may wish to see $1,000 gold, or thereabouts, as a new floor, but there is unlikely to be any official recognition of this and we will have to wait and see whether the supposed Chinese underpinning of the market is reality - or yet another gold bug's dream.

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responses to this article

Mineweb 11 Sep 2009 I appreciate the clarity with which Lawrence Williams writes. Also, the content. Thankyou. by J. Jones on September 11 2009, 11:48 Find this comment inappropriate? Report it

IF China can totally CONTROL The cost of Gold, due to it's immense financial power, what's to keep ANYONE in the market ?. If the price can be artificially held, moved, up/down.....where's the incentive? to own it, when you can invest your cash into income producing . .more assets?. Also, would it not behoove China, to ACQUIRE as much as possible, to RAISE the price to $4-$5k per oz?, then their US Dollars investment could be basically of NO effect, if they just wrote it off?. Educate a fool........ I know Gold is an Insurance metal.......not basically an investment tool. . .less by Terry on September 11 2009, 12:06 Find this comment inappropriate? Report it

Gold I find it so ironic that a communist state is embarked on teaching the US a lesson in free markets. But glad that the manipulation of the gold market is finally coming to an end. by William Feader on September 11 2009, 14:28 Find this comment inappropriate? Report it

Market It's a currency that can be dug up and not created out of thin air, why not spread it around, good on them by Mark on September 11 2009, 15:46 Find this comment inappropriate? Report it

China's Dollar Holdings? Were does $2 Trillion in US come from? It's been well published that China had $700 Billion US Dollar denominated funds before they started to diversify months ago. by Bruce on September 11 2009, 17:26 Find this comment inappropriate? Report it

NOT WORRIED If this leads to a currency being unable to dominate or be easily manipulated, then I'm all for it....especially if it means responsibility is spread around so that no single entity such as Wall Street or the Secret Government can affect the world . .more as they have. Gold will certainly be more difficult to move or change at the clik of a mouse. I'd like to see all digital paper everywhere be backed by it (again). Might slow this world down a little bit so that we can live more peacefully. . .less by DENNIS on September 11 2009, 20:58 Find this comment inappropriate? Report it

My Comment My view is that the Chinese will keep their T- Bills as a souvenir for future generations. Perhaps they will not even try to diversify from them. I suspect they already know what the intrinsic value is likely to be. The big deal though is that they . .more are unlikely to continue purchasing any more, so that tap must surely be closing or closed for the US. Similarly in light of a green economy, I think China will be a green economy much faster than is currently imagined. The West will have to seriously look at its own back yard, if it is to have a noteworthy future. Pardon the pun. . .less by Gavin on September 12 2009, 01:53 Find this comment inappropriate? Report it

Bringing down the Comex I am glad to see that China has convinced Germany, Hong Kong, and whoever else they may have success with to retrieve there physical gold from the shores of the USA and London. I really doubt that it is all there, How reliable can a storage . .more facility be that is never inventoried ? . .less by Raymond Lee on September 12 2009, 11:05 Find this comment inappropriate? Report it

Chinese wisdom We were foolish enough to encourage the Chinese to "be like capitalists in the west", now they are taking the pot. This is a culture/race that is 5,000 years old,discovered the compass,gunpowder and the compound bow and will demand and receive . .more toll roads within the US in order to pay back on the soon to be seriously devalued US dollar that they carry. Look forward to $10.00 tolls on our roads going straight to China. I have read that the state department is already acquiescing to their demands of massive transfers of military technology to make good on many bad debts that they were suckered into. They now own us,most just don't realize it yet. . .less by Dave on September 13 2009, 09:37 Find this comment inappropriate? Report it

ahmed777@walla.com IMF may sell 403 tonnes of Gold next month,after which the price may fall,though,there is an agreement that this will be done without affecting the price of Gold! by ahmed on September 15 2009, 14:14 Find this comment inappropriate? Report it

gold101 coins iwanttomakemoney coins . by carolgalloway@windstream.net on October 09 2009, 16:52 Find this comment inappropriate? Report it

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