GOLD ECONOMY

GOLD AS CHINA'S POSITION

China just recently cashed in about 2.4% of its dollar reserves to buy gold. It has a better track record than the dollar. In fact, gold has a better track record historically — than any paper currency.

 Precious Metals Megatrend:
China's Secret Endgame

Fan Gang, director of China's National Economic Research Institute, stood in front of a standing-room-only crowd at the World Economic Forum in Davos, Switzerland.

In halting English, he said:

The U.S. dollar is no longer, in our opinion… a stable currency. It is devaluating all the time, and that's [making] troubles all the time. So the real issue is how to change the regime from a U.S. dollar pegging to a more manageable reference, say, euros, yen... those kinds of more diversified systems...

And it's not just China. Malaysia is also shifting from the dollar. So is Indonesia. And Thailand. And possibly Japan. But who could blame them?
China and Japan alone own about $906 billion of the $1.1 trillion of U.S. Treasuries held overseas.

But a weak dollar is a wasting asset. To the Chinese, it's starting to look like a giant pile of liabilities. Yu Yongding, who sits on the Chinese central bank’s monetary policy committee, told the China Securities Journal he was worried America would drop interest rates in 2006, putting pressure on the dollar and the yuan.

"More seriously," he said, "China's economy would take a big hit if the U.S. dollar weakened sharply due to such factors as a bursting of the U.S. property bubble. The loss for China's foreign exchange reserves would be extremely serious."

They won't hang on for long.

Publicly, the talk is of China moving more of its currency reserves away from the dollar and to the euro. And that might happen. But the euro is only paper too, backed by its own debt problems at home.

The real story is China quietly converting those dollars into... you guessed it... GOLD.

China just recently cashed in about 2.4% of its dollar reserves to buy gold. It has a better track record than the dollar. In fact, gold has a better track record — historically — than any paper currency.

On Dec. 28, 2005 — the same day as the first in a series of recent U.S. yield curve inversions that we just talked about, an economist at China's biggest brokerage firm, China Galaxy Securities, quietly hinted China's central bank should quadruple its gold reserves in the very near future.

Japan's central bank has also talked about cranking up its gold reserves. So have the central banks of South Africa, Argentina and Russia. In November 2005, Russia said it would hike up its gold reserves from 5% of total financial reserves to 10%.

That's double what it's already holding now.

To get it, Russia would have to absorb its own entire gold output for the next three years. That's a long time for the rest of the world to go without Russian gold production.

Any more whispers on the news about this and the China gold reserve hike could send gold prices skyrocketing overnight. You'll want to be ready to profit on this surge as soon as you can.

Gold ETF

Buying gold is as far as you can get from today's complex and exotic debt markets. They're making headlines for all the worst reasons today, as banking stocks plunge, mortgage bonds slip into default, and losses pile up at hedge funds.

Gold, on the other hand, is recording near three-decade highs, and it still doesn't owe anything to anyone. In our current financial marketplace, that makes gold rarer still.

Gold's lack of "default risk" also sets it apart from the mountain of debt built up by Western consumers and their governments. The big picture?   

  • The average British household now owes nearly £9,000 (almost $18,000) even before you account for its record mortgage debt
  • The U.S. government has run up $9 trillion in debt, much of it owed to fast-growing Asian economies like China and all of it waiting for U.S. taxpayers to make the repayments
  • Even in Europe, the single currency Eurozone now faces a housing-debt slump in Ireland and Spain. Italy may have to pull out of the euro.  Greece's high-spending government should have pulled out five years ago.

Gold ETF

Compared with this epidemic of debt, very few people own gold. Fewer still own it outright, in their name alone. However, the global derivatives market of financial promises has doubled in three years, to stand above $415 trillion. That's more than eight times the value of the entire world economy!