Column: Trump 2.0 won’t reverse Biden’s critical minerals push
Donald Trump has described the Inflation Reduction Act (IRA) as a "green scam" and vowed to repeal it after he returns to the White House in January.
In the past two weeks we have highlighted the importance of Russia and the world’s central banks to the bullish gold price narrative.
In our recent article “From Russia with Gold”, we detailed that Russia has the 2nd largest unmined gold reserves in the world. Its gold production since 2008 has risen dramatically and remains on the rise. And the Russian central bank has been steadily increasing its official gold reserves since the 1st quarter of 2007, in the lead-up to the Global Financial Crisis (GFC).
In addition, last week our esteemed managing editor and chief analyst penned an excellent essay entitled “Hiding in the Gold Demand Shadows”, which demonstrated the fact that central bankers worldwide (i.e. in emerging and developed countries) fully recognize the importance of gold.
Certain emerging market central banks, in particular the BRIC nations, have been net buyers of gold since the GFC. In addition to the BRIC’s, Turkey is also on track for a record year of gold imports at an estimated 270 tonnes.
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However, it’s the speculation about the accumulation of central bank gold reserves by the “C” in BRIC that attracts my focus this week and therefore we are back to talking about China.
If there is something China does a lot of, it’s planning. This week, they’re at it again.
Since China’s economic rebirth in 1978, which marked the beginning of their “Reform and Opening Up” policy, they have demonstrated a strong tendency to carry out their stated strategies. Aptly, when they now announce their plans, the world tends to listen. At least it ought to.
The financial press was abuzz this week with the announcement that “China’s ruling party pledged to let markets play a decisive role in allocating resources.” This, the abbreviated summary of the results of China’s most recent 10-year planning session, is different from previous policy statements where China is on record stating, “markets will play a basic role in allocating resources.”
The change in wording from “basic” to “decisive” was no doubt intended to send a clear message to all observers, domestic and foreign, that China fully intends to continue on the path of “Reform and Opening Up” by liberalizing and globalizing its economy, which includes the structural reforms needed to fulfill the pledge.
China’s Central Committee of the Communist Party elects a new President and Premier every 10 years. The current president and premier, Xi Jinping and Li Keqiang, were newly elected in November 2012 and ever since, the world has been anxious to learn of their intentions for the next 10-year stretch.
The 10-year plans are supplemented by 5-year plans, which we’ve spoken of many times in connection with China’s commitment to developing its gold market. In our article, “China to Rebuild Great Wall with Gold!” we composed a brief history describing how China has included the advancement of its gold market as a key component of its planning and economic ascendance.
One of the most significant changes to China’s gold policy occurred in 1993 when they allowed the market to set the price of gold instead of the state. But this was just the beginning. In 2000, China explicitly announced its intention to establish an open gold market as part of its 10th five-year plan.
In keeping with their tendency to deliver on its plans, China has exponentially increased their domestic gold production to an expected record of 430 tonnes this year, making them the world leader by more than 60%.
They have also invested heavily in developing gold markets abroad while aggressively promoting and facilitating easier ways for citizens to buy, sell, and store gold.
One substantial pillar of China’s gold infrastructure that enables their gold hungry citizens to access the physical metal is the Shanghai Gold Exchange (SGE), which was established in 2002. To put in perspective how much physical gold is delivered via the SGE in comparison to world mining production, we present the following chart.
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Note that in 2013, the amount of physical gold transiting the SGE is now approaching total world mined production of the yellow metal. This is as bullish as it gets.
Another aspect of China’s gold infrastructure is the Shanghai Futures Exchange (SHFE) which satisfies domestic hedging demand. Since the exchange introduced its first futures contract in 2008 it has become a dominant force in the gold futures market.
Even though the SHFE gold contract is only available to domestic market participants so far, the contract is the 4th most traded and the 2nd largest gold futures market in the world. This has taken place in the span of only five years.
There are other recent newsworthy examples that demonstrate China is executing their planned gold market strategy.
The 2,000 tonne gold vault that opened this week in Shanghai and the October purchase of the former JP Morgan headquarters in New York by Fosun International, which just so happens to house the largest commercial gold vault in the world, would be two such examples.
In summary, China’s net gold imports year-to-date from Hong Kong (their primary conduit) have been truly staggering at 856 tonnes. And, although many gold commentators seem hesitant to crown China as the world’s new leader in this category, we aren’t, they are!
They dominate global gold production and imports and are rapidly developing their domestic market infrastructure to accommodate gargantuan domestic and international gold trade.
Despite the substantial amount of gold China imports to serve local demand, what is coming to light this week is the significant amount of gold the People’s Bank of China (PBOC) has potentially accumulated.
Klapwijk comes to his conclusion by way of anecdotal evidence, which he says must be used because the Chinese are opaque, at best, about their official gold holdings.
His analysis points to a discrepancy between the amount of physical gold being supplied to the domestic market from mining (none of which is exported) and imports (primarily from Hong Kong) and the amount of actual investment and jewelry demand in the country.
In simple terms, the amount of supply exceeds the amount of public demand by a significant amount, and thus the surplus gold in his analysis is being bought by the PBOC.
A Bloomberg analyst, Andrew Cosgrove, arrived at a similar conclusion. He projected that the total growth of PBOC gold reserves for 2013 could reach 620 tonnes.
The last time that the PBOC announced the amount of its official gold reserves was in April 2009. At that time it stated that their holdings had increased from 600 tonnes (announced in 2003) to 1,054 tonnes. Essentially, China had doubled its official gold reserves in 6 years without letting on.
One straightforward reason as to why they do not report their gold buying activities is because they do not want to tip their hat and cause the price to rise dramatically. The PBOC also has to be careful about creating too much volatility in currency markets.
However, China has a pattern in recent times of announcing their gold holdings every 5 to 6 years and thus the date for the anticipated next announcement is fast approaching.
According to James Rickards, author of the superb book Currency Wars, in April of 2014 China will shock the world and announce that they have accumulated 5,000 tonnes of gold. This would give them the 2nd largest official gold reserve in the world, second only to the U.S. with a reported 8,133 tonnes.
They are accumulating gold as a foreign exchange asset as one aspect of a broader plan to elevate their currency in international stature commensurate with the size and importance of their economy, the 2nd largest in the world, again second only to the U.S.
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China has over $1.7 trillion of U.S. dollar denominated assets, the largest of any nation by far, and therefore has been critical of profligate U.S. monetary policy.
Their criticism, however, has fallen on deaf ears. This week Janet Yellen, likely to replace Ben Bernanke as Fed Chairman early next year, spoke in support of continuing the Federal Reserves’ unprecedented monetary stimulus program indefinitely.
Yellen’s dovish posture offers little comfort to the Chinese and underscores China’s efforts to diversify away from the dollar as quickly and yet as stealthily as possible.
In summary, it is reasonable to assume that the PBOC is accumulating gold in significant volume annually, and 2013 has likely been a banner year indeed.
We know that the Chinese tend to follow through on their plans and they have made it clear that gold is considered a strategic monetary asset. If history is any indicator, China will soon announce an updated figure for their gold holdings, and if their production and import statistics are any gauge, then it is likely, as Jim Rickards says, their next announcement will shock the world.
We’ll leave you with the following visual just to give you an idea of what these numbers could potentially look like as China makes good on its strategic gold accumulation plans.
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The Tocqueville Gold Fund is one of the top performing gold funds. Its highly respected portfolio manager, John Hathaway, is bullish on the gold price due to the extreme monetary policies being pursued in the West, led by the U.S.
Although he includes both gold and gold miner’s stocks in his fund, he prefers gold mining stocks to gold because they typically offer 1.5 to 2 times leverage to the gold price.
We share his views. As such, we present our Gold Miners Comparative Analysis Table, which has a multitude of critical metrics to use in evaluating and comparing gold mining companies.
In the pages of our newsletter we educate our subscribers on what to look for when discerning between the different gold miners and guide them towards those that suit their individual appetites for risk.
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That’s it for this week. Thanks for reading!
Regards,
RJ Wilcox
