China's Gold Bubble Problem. Don't Trip, They're On It, Swear Ta

Monday, December 21, 2009 , , , 4 Comments

It is with great sadness that I say the following: the Chinese are kind of right, gold is turning into a big anxious ball of speculative "frenzy" and it doesn't appear to be calming any time in the near future. Why would it? We all know who is in the captain's chair furiously printing dollars in the Fed's basement so why the hell would gold chill out? FOUR MORE YEARS!!

UK's Telegraph:

Hu Xiaolian, the vice-governor of the central bank, said Beijing would not buy gold indiscriminately.

“We must keep in mind the long-term effects when considering what to use as our reserves,” she said. “We must watch out for bubbles forming on certain assets and be careful in those areas.”

China announced this year that it had quietly doubled its gold reserves to 1,054 tonnes, the world’s fifth largest holding. India has also joined the rush, gobbling up half the IMF’s gold sale.

News that the rising powers of Asia are shifting a chunk of their fast-growing reserves into gold in a flight from Western paper currencies has emboldened investors to take out large gold bets on the futures markets or through exchange traded funds (EFT), leading to the parabolic rise in price over recent weeks.

However, officials in Beijing are aware that China’s $2.3 trillion reserves are now so enormous that the central bank cannot buy much gold without distorting the price, so they have adopted a de facto policy of buying in a calibrated fashion each time prices fall back to their rising trend line – “buying the dips” in trading parlance. Experts say that China is putting a floor under the gold price but does not chase rallies once they are under way.

There is also a double-edged twist to news that Barrick Gold, the world’s biggest gold mining company, has closed the final 3m ounces of its notorious hedge book ahead of schedule. While the move is a bet that prices will continue to rise, it also means that Barrick has been a big buyer of gold lately. These purchases have now stopped. One of the key drivers behind the spike this autumn has been removed.

Whatever. It's still a whole hell of a lot safer than muni bonds.

And IMHO, China knows damn well there's no danger of a gold bubble. It's a trick, stupid! If you look back at their track record, you'll see that they're obviously not too skilled in the art of investing wisely (had they been, they wouldn't be sitting on $2 trillion in our garbage GSE MBSs) so I wouldn't be too confident in their clairvoyance in the gold market moving forward. Let's face it, Bernanke and the rest of the Dollar Demolition Crew aren't taking their big dumb feet off of the gas any time soon...

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


Anonymous said...

I love you!! Couldn't have said it better..

Love you too, Anonymous. I'll be here all week, don't forget to tip your waitress. ;)


Anonymous said...

For everyone who is not a central bank, you think it's safe to keep buying gold on the dip alongside the Chinese?


You're kidding right? Gold has a long way to go and though some might disagree with me, so long as Ben Bernanke has a sore printing arm, gold will keep surging. For the central banks, it's a matter of sneaking out of worthless assets (*coughdollarscough*) and covering their own asses.

So yeah, not only safe but necessary. Ignore this from the Chinese, they don't know how to do anything but bluff.