The Only Time I've Ever Agreed with Alan Greenspan
Chief Investment Strategist, Money Map Report & Total Wealth
Editor's Note: Former Federal Reserve Chairman, Alan Greenspan, has been busy making the circuit in an attempt to do two things...sell his new book and salvage his reputation for actions he took during his time at the helm of the FED.
There have been extensive coverage of his comments of late. Yet, virtually no one has commented on Mr. Greenspan's remarks regarding the growth of Chinese gold reserves...and the implications. Lucky for us, our good friend and regular contributor, Keith Fitz-Gerald, has been paying attention. Please take note of Keith's observations and analysis below to understand the impact of the Red Dragon's hunger for gold on our future and what you should do as a result.
Former Fed Chairman Alan Greenspan recently weighed in on China's gold reserves and made a really key point.
He noted that if China were to convert only a "relatively modest part of its $4 trillion foreign exchange reserves into gold, the country's currency could take on unexpected strength in today's international financial system."
It's the only time I've ever agreed with him.
As usual, the Western press glossed over his remarks. They preferred to focus on other stories in the news that day, ranging from the drop in the price of crude oil to the crash of Virgin Galactic's spaceship. So did most investors who really don't understand the implications. That's a big mistake – and potentially a very costly one, too.
That's because not one in 100 Western investors is watching China's latest moves to acquire gold as closely as they should, if at all. But if you own gold, you need to know what China's scramble to beef up its gold reserves means for your portfolio.
What China's Bid For Reserve Currency Status Is Really About
China's gold purchases are an integral step in their quest to supplant the U.S. dollar as the world's next reserve currency with their own currency the Yuan or as it's also known, the renminbi, which means "People's money."
Many people – read Westerners here – simply cannot grasp the implications, so they dismiss the possibility. China is a communist nation, they charge. There's no democracy, cry others. These detractors might as well join the "Flat Earther's Society."
This is a numbers game, pure and simple.
China has had the world's largest GDP for 18 out of the last 20 centuries. According to the International Monetary Fund, that nation just took over... again.
When this year wraps up, China will represent 16.48% of the world's purchasing power GDP at roughly $17.632 trillion, while the U.S. will make up only 16.28% at approximately $17.416 trillion.
Figure 1 - International Monetary Fund
It makes absolute sense under the circumstances that China will boost gold holdings to accommodate the growth and diversify the $3.89 trillion in foreign reserves they hold.
This, too, is something Western analysts have a hard time understanding. They simply cannot understand that China is making moves that have one purpose – to wrest pricing power away from New York's Comex and install it in Shanghai.
Here's the thing.
Paper assets or fiat currencies have a nasty habit of eventually failing. Every fiat currency that has faced the test of time has suffered devaluation and collapsed, going all the way back to the Roman Empire. China knows this from having studied the West in excruciating detail. That's why it's busy constructing everything it needs to eventually back its currency with hard assets while modernizing its financial markets, legal structure and reserve investments simultaneously – including gold.
Again, I cannot stress this strongly enough: This reading into China's actions isn't a grand conspiracy theory. It's not a made up construct. This is happening right now... in plain sight.
Gold is but one element of China's master plan.
Recently China announced a $100 billion fund to make infrastructure loans to the developing world as part of a joint effort to create an alternative to the International Monetary fund and bypass traditional dollar denominated currency channels.
Since 2009, China's set up hundreds of billions in bi-lateral swap agreements with more than 20 nations that now total more than ¥2.7 trillion including notably Canada, England, and Switzerland. Even the ECB is in on the action.
As of 2013, the yuan became the world's eighth most traded currency despite the fact that it's still officially "blocked."
On November 17, 2014, China established the Hong Kong stock Connect. Ostensibly, with the opening of Shanghai's markets to Western investors, what Beijing is really doing is opening local capital markets to increase liquidity and cross-border cash flows. It's worth noting that the markets hit the ¥13 billion renminbi trading limit less than five hours after the markets opened.
It's entirely logical that Beijing wants more pricing influence.
The other thing to consider is that China produces nearly 400 tonnes of gold a year, none of which is exported. You almost never hear about that in the Western press. Or, if you do, it's some sort of afterthought.
In fact, the Red Dragon is probably pushing some 6,500 tonnes in reserve or more than three times western estimates when you combine known imports and Chinese domestic production.
And that's something the West really should understand.
Any nation with growing asset reserves like China has to diversify their holdings into alternative asset classes including gold because the dollar is too risky, the euro is shot, and there isn't enough liquidity left.
More to the point, every ounce of gold that China buys is removed from the markets. Not only does this shift pricing from London and New York, but not a single speck of that will likely hit the markets ever again.
So now what?
How China's Gambit Creates a Phenomenal "BUY" Opportunity
That's a logical question and it depends entirely on your outlook. I believe gold will drop further but that doesn't invalidate the argument for owning gold one bit. If anything, I believe it creates a spectacular buying opportunity.
The way I see things, China is playing a very patient game so Beijing is perfectly willing to buy at these levels knowing full well that the cycle of lower prices will eventually end. I believe investors should, too.
The last thing on earth China wants is for everybody to figure out the game it's playing because that would drive the price far higher. Author Jim Rickards, who wrote the Death of Money, puts it this way noting that China's strategy is like a game of Texas Hold'em. "You want a big pile of chips. The U.S. has a big pile of chips, Europe has a big pile of chips. The U.S. has 8,000 tonnes of gold, 17 members of the euro system have 10,000 tonnes. China at 1,000 tonnes is not a player, but at 5,000 tonnes, they are a player."
One of these days – and probably a lot sooner than people believe – China is going to announce that it holds 6,000 or even 7,000 tonnes of gold. When that happens, it's going to realign the gold markets as we know them today.
Anybody who already has gold in their portfolio is going to instantly reap the benefit as prices rise. Anybody who doesn't...
...well let's just say they're going to wish they did.
During his 30 years in the global markets, Keith Fitz-Gerald has guided hundreds of thousands of investors to financial success. Twice each week, he shares his insight on the latest market trends, investment tactics and risk management techniques in Total Wealth. You can receive all of Keith's advice and his latest special report, How to Tap into a $17 Billion Trend for Just $1.00 a Share, absolutely free, at www.totalwealthresearch.com.