China's gold holdings and recent purchases

For some weeks I have been writing in other professional papers and sites that investors should be adding to their gold positions, taking advantage of the slide in the price of gold.

I have also been saying that it is no small matter that China has become very vocal on their concerns about the mounting US debt, to a point where they have raised the issue of continued new purchases in the amounts they have been as well as reducing the level of US debt they hold.

They, as well as other countries are doing exactly what they said they would do, quietly and without much fanfare but, it is noteworthy and one more indication of the concerns regarding the level of debt the administration is piling on with the bailouts, stimulus and other spending programs known to be part of the Obama administrations' agenda.

China is now, at 1,000 tonnes plus, the fifth largest holder of gold bullion in the world and over the past two quarters have increased their purchases significantly.

Traders got wind of this sometime back and last week some of the Chinese subtle buying moves became more open.

Many countries and several multilateral agencies have been selling bullion in order to create liquidity for programs that they would normally finance but, in the current credit crisis are not all that able to arrange and fund. So, they have no choice but to raise funds by selling off portions of their bullion reserves.

We all know (some of us have known for quite sometime) that many hedge funds and institutions had to sell and are still selling their positions for liquidity needs as well.

This selling pressure along with the general uneasiness in the markets has tended to keep a lid on the price of gold despite the future inflation that anyone with even an economics 101 course under their belts knows is looming as a result of all this spending and bailout madness.

If it were just that China and India and some other countries were buying gold and substantially more than usual, it might be something to just say hmmm about but, this time around I think there is much more to it and more attention needs to be paid than hmmm.

China holds more than $2 trillion dollars in Forex reserves and have now, as I said above, become very vocal about that fact and their concerns about the US financial position. Who could blame them? In point of fact, if anyone here is holding a large portion of their portfolio in US Treasuries because they want safety, you should have some second thoughts about the safety issue, especially if you are in the shorter maturities.

There is a monster bubble in that segment of the debt market at the moment and we all know or should now know what happens to bubbles when the first guy decides to leave. Many analysts are sounding warning alarms about it even though in my opinion it is late. I did not say too late, just that it is late.

Some analyst look at that segment of the market and use it as a basis for why they believe the stock market will rally soon and a new major bull market will be on.

Nothing could be further from the truth in my mind.

There are still many more shoes to drop on the US financial system. I have written about the commercial real estate market recently, which is now beginning to fall and there are many others, but that is not the topic of this blog.

China is increasing its' purchases of gold on three basic positions:

1. By increasing their bullion holdings they are at the moment trying to maintain their traditional position of having 10% of their reserves in gold. This has been the number for more than 30 years. However, I believe that they are not only trying to hold to that percentage but, are in the process of increasing that percentage and I think it is going to be more than just a few percentage points based on their justifiable concerns about the US financial position and the dollar. Many countries in the European Union hold as much as 60% of their forex in gold and some other countries are as high as 70% to 75% in gold. I am not suggesting that China is headed to that level, but, I am convinced that they are going to go above 10%. For now I believe the target is no more than 20%, but even that will require them to spend another $200 + billion in new purchases of bullion.

2. With every new ounce of gold they buy, they automatically reduce their US dollar reserve mountain and we know for a fact that they are doing that and now in a not so subtle manner. They want and need to substantially reduce their dollar holdings and by shifting a portion of those reserves into gold they are not only reducing their dollar reserves but they are also buying a hedge against the impending inflation that is a certainty.

3. They are also into an economic stimulus plan which they will most likely fund by using the dollar reserves they have so as not to have to print too much money and set off a round of internal inflation but, they are still going to have some internal inflation as a natural result of the US inflation that will come and buying gold now is a great way to prepare their balance sheet to help them with some of that fallout.

There is also the possibility of a slight sinister reason as part of all this and that would be to deliver an even greater message to Washington (not that the boys and girls there will get it or heed it before it is too late) but, it is to raise the stakes in some of the upcoming negotiations that the administration is going to have to get started with China and the Chinese like to go into negotiations with the battles understood, planned for and in their minds, already won or at least the outcome they are prepared to accept certain.

Warning shots over the bow of the USS America and people need to pay attention.

By the way, one significant event you will hear about in the coming weeks: The IMF is looking to sell about 400 tons of gold. I don't think they are going to dump it onto the London or New York or any exchange for that matter. I think there will be an "off market" deal with the Chinese.

Pay attention and when you see or hear about that happening, understand that it is a confirmation of the Chinese move away from and out of the US dollar which is a vote of "no confidence" in America and this administration as far as I am concerned.

By the way, if you want to protect yourself and your portfolio a bit and I suggest you think seriously about that, other than buying gold bullion which costs a lot to store (unless you are one of those who bury it in the backyard or put it in a safe in your house), you can buy gold minning company stocks and now you can buy ETF's in gold which trade just like stocks but are valued according to the price of gold bullion. Check with your financial advisor on it. If he doesn't know about them or tells you that you shouldn't do it, I would think real hard about keeping him as an advisor.

The US is in a deep hole and Washington keeps digging with abandon thinking they are digging their way out.

As a boy I used to love the story about digging deep enough and coming up in China. In this case, what is happening is the powers at be are digging and it is deep and most likely the Chinese know it and that is why they are increasing their buying of gold because they know the story too and they know that at some point the hole will cave in on itself long before the diggers come up in China.

Some of the dirt is already starting to fall in on Washington and unfortunately for all of us, we are going to feel it as well unless we can get them to stop digging.

Someone has to say it! I did.