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2 responses to “Why Was China Carrying Gold?”

  1. Hi Keith,
    Really great post. I’ve been tracking the unwind in the copper trade rather closely these last few months. If I understand you correctly, you’re saying that this carry trade of sorts is happening with gold as well, which leaves the potential for a similar unwind.

  2. Nice post Keith. Like Mahatmadonnie above, I also read into your post that you would expect that both copper and gold will similarly unwind eventually. I am not so sure since there may be a willing buyer of the gold metal but not of the copper. You state:

    “I would discourage everyone from making too much out of the Chinese gold carry trade. It’s not a giant conspiracy to buy up all the gold, while suppressing the price. It is not some farsighted plan to anticipate the collapse of the dollar by owning hard assets. Those who use credit to buy gold there are subject to the same challenges as those who do it here in the West.”

    It may in fact be a brilliant plan by the monetary and fiscal authorities to do just that. Unlike copper, gold is a monetary metal whose primary utility is as a store of wealth since very little of it is actually consumed. I agree that the Chinese corporations are probably only interested in arbitraging (straddling) the spread between US and Chinese interest rates. They are not likely expecting to own this metal. However the Chineese authorities may be more than willing to pick up this metal from the corporations if and when these positions are unwound. China has stopped buying US treasuries and has stated that they would like to diversify their foreign reserve holdings. Why not simply buy this metal from these same corporations that will be wanting to unwind their positions? The metal is already safely onshore in Chinese vaults and out of reach of the USD based banking and financial system. When the corporations unwind their positions the paper price of gold will likely fall, allowing the fiscal and monetary authorities to buy up this metal at less than the then marginal cost of production. They will have brilliantly exchanged near worthless paper dollars (since their ability to purchase hard assets is limited by US policies) for massive quantities of bullion gold at commodity prices. So where would the Chinese authorities get the USD to purchase this metal? By selling their massive store do US treasuries. Wouldn’t this destroy the value of their US bonds? Not if the Fed steps in to buy these same treasuries which they likely would do in order to protect the US banking and financial system from collapse due to a collapse of the treasuries market and to avoid a mind numbing deflation.

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