At the same time, top Communist party bureaucrat Li Lianzhong said: "Should we buy gold or U.S. Treasuries? The U.S. is printing dollars on a massive scale ... there is no doubt that the dollar will fall. So gold should be a better choice."
On Monday, People's Bank of China Governor Zhou Xiaochuan rushed to say that the nation won't change its currency reserve policy suddenly. "Our foreign-exchange reserve policy is always quite stable," Zhou said soothingly.
What the heck? Is China off its meds? No, the answer is more likely that China sees the slide it triggered in the dollar as too much, too soon. China wants more time to BUY GOLD ... and a bunch of other commodities while the dollar still has value.
Secret Moves in the Gold Market
The problem is the sheer size of China's foreign reserves - $2 TRILLION worth. If China decided to hold 5 percent of its current reserves in gold (the international average is 10 percent) it would need to buy more than 3,000 tonnes of gold - or about one full year of global production.
What do you think that would do to the gold price? It would send it through the roof!
China can't move fast - its foreign reserves are HUGE! It needs time to get everything in place - this could take years.
China has already been making secret moves in the gold market. In April, China disclosed that it had stealthily increased its holding of gold to 1,054 metric tonnes from just 600 tonnes in 2003.
That puts China's gold holdings at 1.8 percent of its foreign exchange reserves - still way, way too low! In fact, in his speech, Li cited the high share of gold in the foreign exchange reserves of the United States, Italy, Germany and France, to argue that China's gold holdings should be much higher.
What would China sell to buy gold? Probably U.S. Treasuries. China is the largest single holder of U.S. Treasuries, with $763.5 billion at the end of April, according to U.S. Treasury data.
Of course, if China sells Treasuries, that would weaken an already troubled U.S. dollar.
This would have a double-barrel effect on the price of gold - pushing gold prices up as China buys gold, and pushing the value of the dollar lower ... which in turn would push gold even higher, because gold is priced in dollars!
Official Gold Holdings
by Country*
Country Metric Tonnes Percent of Reserves
- USA 8,133.5 78.3
- Germany 3,412.6 69.5
- Italy 2,451.8 66.1
- France 2,450.7 73.0
- China 1,054.0 1.8
- Switzerland 1,040.1 37.1
- Japan 765.2 2.1
- Netherlands 612.5 61.4
- ECB 501.4 18.3
- Russia 536.9 4.0
* World Gold Council, June 2009
And China's not just buying gold. Just since the beginning of the year, China has purchased ...
- Oz Minerals, the world's 2nd-largest zinc miner for $1.7 billion.
- $20 billion worth of Rio Tinto, one of the three largest iron ore producers.
- A big chunk of Fortescue Metals, an Australian iron ore company.
- $46 million worth of Australia-based lead-and-zinc producer Terramin.
- Half of Ontario's Liberty Mines, a nickel producer.
- Verenex Energy, a Canadian oil producer operating in Libya, for $449 million.
- A 45-percent stake in Nigeria's Akpo oil fields
.
The list goes on and on! There are too many to list here.
Why is China doing this? Its currency is hooked to the dollar (for now) and it wants to buy boatloads of commodities and natural resource companies while the dollar still has value.
So obviously, the cat was let out of the bag last week. China's actions are a lot different from what it says now.
A Race Against Time ... a Race for Gold!
But it's a race against time, as other countries around the world also press for a new super-currency - and also rush into natural resources, including base metals, oil ... and GOLD!
The SDR basket will be revised next year. Right now, it only includes the dollar, yen, euro and the pound.
It is clear that the Chinese will push to include their currency, the yuan or renminbi, in the basket. But Brazil wants a piece of the action, too!
After all, Brazil is a producer of raw materials. There is already a much deeper bond market for debt denominated in Brazil's currency, the Real.
And now the Russians are openly pushing for their currency - the ruble - as well as the other commodity currencies, the Canadian and Australian dollars, to be included in the basket.
The more other currencies go into the SDR basket, the less U.S. dollars are needed - and the more the greenback could tumble!
