Today one of the greats in the business says that despite repeated interventions by the BIS to halt gold’s advance, China plans to send the price of gold skyrocketing.
China Plans To Send Gold Prices Soaring
(King World News) – Dr. Stephen Leeb: “When you write a Ph.D dissertation, before you’re awarded your degree, you go before a panel of professors who grill you about your work. If you can’t defend your arguments well enough, answering every counterpoint your questioners (tormentors) raise, you can say good-by to putting a “Doctor” before your name.
It’s a nerve-wracking test. But it’s also useful. If you can’t answer reasonable questions convincingly, maybe your case isn’t so strong after all.
I’ve been making the case that gold is on the threshold of a sustained bull market. In a nutshell, my case centers on China. In the past decade and a half, China has surpassed the U.S. as the biggest global trader. China, which, like the rest of the world, got burned by the 2008 U.S. financial crisis, is leery of the dollar. It wants an international monetary system that isn’t dependent on the dollar, or any paper currency for that matter. China has a deep abiding faith in gold and has been accumulating gold as it anticipates bringing about a monetary system in which gold will be an integral part. Implementation of such a system will be one reason gold will soar…
Another will be growing resource scarcities. These, too, relate to China’s rise as the country continues to spur creation of huge amounts of infrastructure throughout the East, including in China itself.
That’s my thesis in its simplest form. If I had to defend it before a panel of skeptical and learned inquisitors, how would they try to undermine it? And how would I answer their questions?
It so happens that I recently ran into someone who, while interested in the idea of a bull market in gold, also was skeptical. He asked some good questions. His first question: If China has been buying up so much gold, why haven’t gold prices been shooting up already? Doesn’t this mean there also are sellers of gold? What reason is there to expect that at some point China’s demand will push prices higher?
His second question: Why expect a major paradigm shift, where everyone suddenly will be less willing to trust dollars as a form of exchange and will want to know a currency has some sort of gold backing? After all, this skeptic points out, currencies have long been abstractions. They work because people have faith in the system that issues them. People today are willing to accept a $20 bill not because they expect to march to Fort Knox and exchange it for gold but because they believe the U.S. will be around for a long time and that its cash will be good. Why doubt this will continue?
As I said, good questions. Let’s start with the first: Why hasn’t gold been soaring if China has been buying so much?
At the start of 2002, gold was trading in the mid $200s. It made a high of $1,920 in 2011 and then corrected by about 15 percent. It continued to trade at around $1,600 in 2012 and the first quarter of 2013. Then two major falls, in April 2013 and June 2013, left gold near $1,200. This is around the midpoint of the $1.050-$1400 trading range that has persisted over the past four years.
The BIS Intervenes
I see two factors accounting for gold stagnating over the past five years. First, in 2013, the Bank for International Settlements (BIS) issued a set of rules designed to prevent the kind of financial debacle that had rocked the world in 2008. The rules mandated that banks hold a healthy percentage of liquid assets, and they listed the assets that would count towards this quota. But notably, and against all expectations, they omitted gold – even though gold had outperformed the dollar, U.S. bonds, and other assets during the crash. It was a remarkable omission.
It’s not a stretch to interpret the BIS’s action as a deliberate effort to protect the dollar’s position as the world’s reserve currency, especially given some pushback against the dollar that had emerged after 2008. Specifically, in 2009, Zhou Xiaochuan, head of China’s central bank the People’s Bank of China, had urged international financial institutions to consider dropping the dollar and replacing it with some combination of SDRs and gold. So the idea had been bruited, and perhaps the BIS felt it needed to shoot it down. Regardless of its motive, leaving gold off the menu of liquid assets was one big reason that gold dropped in 2013.
The second cause was the global economic slowdown. Until recently, despite efforts across the globe, world growth has been anemic. Even after the recent pickup, many vital statistics remain well shy of previous highs and even below levels reached in 2007. This is true despite recent headlines trumpeting large gains in real median income in the U.S. that seemingly suggest living standards here have reached new highs. The key word is “seemingly.”….more here