China’s Gold Grab

Addison Wiggin – May 9, 2011

  • Gold back to $1,500… China, Russia look to stash away next six years' worth of mine production
  • Ultimate prop for gold price: White House, Congress nearing a deal to raise national debt 16% in the next 18 months
  • European Union's Grecian formula brings out S&P spanking as euro sinks from recent highs
  • China's transformation to "consumer economy" nearing completion as fights break out for white iPhones
  • Reader suggests mortgage applicant "tell the banks to kiss it"… and the tale of one reader who did

O, the irony: As we touch down in Beijing this morning (it's already late Monday night as we write), Chinese leaders are in Washington getting another lecture from Treasury Secretary Tim Geithner about how they should let their currency rise.

We got a hint of China's response in a commentary today by the official Xinhua News Agency. It blames the "plunging" dollar for becoming "the source of many current global economic problems."


The politburo is dropping another hint in the Chinese media that it intends to load up on gold. According to Century Weekly, China will set up new funds to invest in precious metals — adding some diversification among its $3 trillion in foreign currency reserves.

Right now, a mere $48 billion of those reserves are in gold — a paltry 1.7%.

"It is thought that China wants at least 10% of its reserves in gold," writes the dean of newsletter men, Richard Russell. "This means that China is on a massive gold accumulation program."

Michael Pento, a strategist at Euro Pacific Capital, sets an even more ambitious target: one-third of China's forex reserves in gold. "China wants to be an international player, and they need to own more gold than they currently have."

"China is out to have more gold than America, and Russia is aspiring to the same," says Goldcorp founder Rob McEwen. "China wants to show its currency has more backing than the U.S."

For some perspective of just how big a build-up China — and Russia — needs to pull off, let's review a list of the top 10 countries ranked by their gold reserves.

The Chinese want to grow their gold reserves nearly eightfold. The Russians more than tenfold. Between the two of them, they'd have to add 14,438 metric tons to their stashes — equal to nearly six years of global mine production.

"My thought," returning to Richard Russell, "is that there is a 'Chinese put' under gold. Whenever gold corrects a bit, China is there loading up on whatever is available. Other central banks are doing the same thing."

Sure enough, spot gold is back above $1,500 as we write — after dipping to around $1,470 during the commodity sell-off last week.

And silver is up 4% from last week's close, back above $37. As it turns out, China is a factor in the silver market, too.

"If the Chinese weren't significant buyers, I'd be shorting right now," a hedge fund manager tells The Wall Street Journal. He didn't want to identify himself, but the Journal avers he holds "a major position in gold and silver." Well, la di da… still, we like the sentiment.

Meanwhile, back in I.O.U.S.A., there's a rumor going around that the White House and congressional Republicans have agreed to a deal setting limits on some of Uncle Sam's smorgasbord of spending programs.

One small detail: The agreement would also put off all the difficult decisions — Medicare, Medicaid and taxes — until after the 2012 election.

Yeah! Kick the can a little further down the road.

Considering that the Treasury is borrowing $125 billion every month, the deal would effectively grow the national debt another 16% before Election Day. We'll see if this deal even gets a first breath before it gets euthanized.

"The government has a big debt and a deficit," Chris Mayer helped explain the basics to a writer from The Atlanta Journal-Constitution last week. "It means they'll have to print more money to pay bills and borrow more money, which means the value of the dollar will weaken.

"I think the time to sell gold is when you talk to your neighbor and he says he just bought gold coins." Or when he's talking up the latest hot junior mining stock.

Chris still has a couple of favorites, available at bargain prices. One of them could turn every $1 invested into more than $15… which is about when your neighbor would take notice. As always with an opportunity like this, it pays to move early.

Major U.S. stock indexes are adrift as the new week begins. The S&P remains stuck four points below the February high of 1,344 — a key level followed by Penny Momentum Trader editor Jonas Elmerraji.

"According to data from Bloomberg," says Jonas, "72% of the 417 S&P 500 companies that reported earnings results since April 11 have beaten analyst expectations. That's a staggeringly bullish metric — one that doesn't even include firms that merely met estimates. But at the same time, the S&P 500 has increased in value by only less than 1%. There's a big disconnect there."

Here's another: "From a technical standpoint, a big concern is the negative divergence in volume since the 2009 bottom — while early-stage bull markets should see increasing prices on high volume, trading volume has actually been declining as the S&P makes its way higher.

"Luckily, the more disjointed the market becomes, the higher the likelihood that we'll see it snap out of the sideways range we're currently stuck in and move back toward a trending market in one direction or another." That will yield new opportunities for the kind of plays tailored to Jonas' S.T.O.R.M. system — yielding steady double-digit gains in weeks, or even days. Jonas introduces you to how it works here.

The dollar index is settling into a new range this week in the high 74s. It made another big move up late Friday when the German newsweekly Der Spiegel reported that the Greek government is considering whether to withdraw from the euro or not.

Currently, the European Union is proposing that Greece either raise taxes or sell off state-owned assets to solve its debt crisis. But under this new proposal, Greece would not use these new funds to pay down its debt. Rather, it would put up these funds as collateral… so it can take on more debt.

With that, S&P cut Greece's credit rating two more notches this morning. After flirting with $1.50 last week, the euro is back to $1.431.

In the first quarter of 2010, home prices took their worst tumble since the Panic of '08. Data from Zillow reveal a 3% drop since the fourth quarter of last year. Worse, 28% of all mortgages are now underwater.

"Really staggering," says Stan Humphries, the firm's chief economist. If you've been diligently digesting your doom here in The 5, you're not surprised "demand… [is] being completely overwhelmed by supply." House prices are getting bludgeoned by low-ball sale prices for foreclosures.

Humphries is expecting another 8% drop in prices before they bottom next year. It could easily be more. We don't know for sure, but we don't expect the economy to enter into any sustainable recovery period until the gaping hole left by foreclosures in the center is plugged. Not by bailouts or stimulus… but actual demand. In other words, it could take awhile.

Speaking of which, the hapless Fannie Mae says it needs another $6.2 billion from U.S. taxpayers to stay afloat, thanks in part to, umn, bigger-than-expected losses on the sale of foreclosure properties.

If you're keeping score at home, $86 billion of Uncle Sam's money has gone down the black hole of Fannie Mae since the bursting of the housing bubble. Its twin, Freddie Mac, has vaporized another $52 billion.

We've been keenly observing China's effort to develop domestic demand for consumer products… so as not to be so dependent on U.S. and European markets for the geegaws their factories produce. Upon arrival in Beijing today, we were greeted with this welcome bit of news: Fistfights broke out at a shopping mall.

Apparently, the new white iPhone has just been released here. On Saturday, a guy tried to cut in line three times as crowds snaked outside the Apple Store in the Beijing's high-end Sanlitun Village district. Three security guards and a store manager tried to get him to move on. That irked one of the man's relatives, and a shoving match broke out.

Security inside the store, hoping to avoid further trouble, decided to close and lock the doors. That infuriated the customers still waiting outside. They started shaking the glass door… until it shattered.

Beijing Apple Store's shattered door. All this… for a freakin' iPhone?!

By the time everything calmed down, four people came away with scrapes and bruises.

Hmmn… the first time we recall this happening in the States, soccer moms were enraged by the short supply of Cabbage Patch dolls. According to Wikipedia, that was in 1983.

So using history as our handy guide, China has 30 more years before it completely hollows out its own manufacturing base. Outsources its factories to Vietnam, Laos and Bangladesh. And the headlines lament the passing of the Chinese juggernaut.

Which gives us about 30 years before our commentary will be useful here… perfect!

"There are always skeptics about China," writes a reader who caught our note last week that we were headed out this way. "The current ones are Chanos, Roubini, etc.

Their arguments are that China has built highways to nowhere and bullet trains nobody rides and high-rises nobody lives in.

"I think China will probably slow down with the rest of world. But a crash landing? Maybe you and the China team can have some real insight to report and show the readers opportunities for the near term and long term when you are there."

"I really enjoy your reports," a reader writes. "They are fun to read and are informative."

The 5: We don't have any particular insights about how the economy has changed since our last visit a year ago. At least not yet. We just arrived.

But we do have some traveling tips: Pack light. two-three days' worth of clothes, one blazer; have the hotel refresh them when necessary. Wear draw a string trousers and flip-flops; security is still unusually fixated on belts and shoes. Leave your laptop at home; iPads and iPhones pass through the scanners without having to be unsheathed. On long trips, take over-the-counter melatonin: It works and you won't give yourself a headache trying to hydrate with those little bottles of wine.

Readers already here in China are invited to join us and Bill Bonner for a cocktail party Tuesday evening in Beijing… or another Saturday in Shanghai. Drop us an email for details.

"To the whino with enough money in the bank to buy two condos," writes a reader, joining our discussion of people who get the runaround securing a mortgage, "quit with the leverage, buy the damn thing and tell the banks to kiss it."

"My house is appraised at $240,000, with a estimated cost of replacement of $440,000," writes a reader who did just that. "I'm 64 years old. My wife and I have credit scores above 750. We have savings and two brokerage accounts and some extra real estate holdings that are, like our vehicles (five of them), paid off.

"We have about 6½ years remaining on a 30-year mortgage at 5 1/8%. We recently tried to add some of our additional paid-for property to the land our home is on via a boundary line readjustment.

"Essentially, we were giving Chase home mortgage an additional 20 acres of collateral for free. They wanted us to spend $1,200 in fees and about the same amount on extra surveying and filing expenses and to submit to a Department of Environmental Quality a review at our expense.

"After all that, we wouldn't even get a lower interest rate, and because we are both retired, our income is deemed 'undependable.' We are unsure if they would even approve the change. Needless to say, we declined their generous offer and will pay our mortgage off and then do our boundary line adjustments without the red tape and expense. To hell with big banks!"

"I read with mixed emotion comments from the readers who say their bank," writes a banker with 50 years experience, "won't approve their loan even when they have money in the bank and own other property free and clear.

"It's difficult for the ordinary public to understand this, especially when the administration, FDIC and comptroller of the currency say that they want banks to 'make loans.' The problem is that what Washington says NEVER gets to where it's supposed to. The little examiners (I called them 90-day wonders) who come into the bank and raise some of the dumbest reasons why 'that loan should never have been made' have the banks just throw up their hands and refuse to make any loans for fear of being written up for making 'bad loans.'

"When that happens, (a loan being classified), it means that the bank must put aside more money in an account called 'reserve for bad debts' — and where does that come from?

EARNINGS! So if you're really looking for someone to blame, look to the regulators!

"Some examiners are OK, but there are too many of them that just want to make a name for themselves, and they'll classify the best damn loan for nothing more than to let the banker know that they are 'next to God.' And then they threaten the banker if he tries to talk them out of the classification.

"Listen to that crap during each exam and you finally throw up your hands and say, 'O.K, have it your way' and just sit back and take all the criticism from the customers.

"You think I'm kidding? Why not ask some of your banking readers to let you know of some of their experiences. I think you'll be surprised at the response."

The 5: We don't think you're kidding. In fact, it sounds par for the course.


Addison Wiggin
The 5 Min. Forecast

P.S. Last week, the Russell 2000 index of small caps dropped more than 3.5%. But readers of Penny Stock Fortunes still booked an 86% gain on Vishay Intertechnology. The semiconductor firm turned in a fine earnings report. Shares fell anyway. So Gunner took profits.

"As red-hot as many semiconductor stocks have been for the past six months," writes editor Greg "Gunner" Guenthner, "the reaction to Vishay's earnings tells us that sentiment is shifting. Investors are looking for gaudier numbers, plain and simple."

Greg notes that although the S&P 500 and the Russell 2000 both reached post-2008 highs in April, the S&P Semiconductor Index didn't follow suit. "Semis are warning that the party could be over, so we are content to book gains now and search for more-fertile investing grounds."

Congratulations to readers on the near-double. If you're not among them yet, look here.


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