Guest Post: "The Real Reason China Is Buying Up The World's Gold", by Avery Goodman

Thu, May 14, 2015 - 1:26pm

This excellent piece was written yesterday and posted to the Seeking Alpha website. It contains some ideas that, heretofore, many of us had likely failed to consider. Please be sure to give this your full attention.

Again, the source link comes from Seeking Alpha and you can find the article here:

I don't know what their policy is and I have no way of contacting Mr. Goodman directly. So, I'm placing a full C&P below but, if they contact me and ask me to remove it, I certainly will. In the meantime, please be sure to read this extremely well-written and insightful piece. We've all wondered what China's "end game" might be and there are a number of conclusions here that make perfect sense.

I look forward to reading your comments on Mr. Goodman's theories.


"The Real Reason China Is Buying Up The World's Gold"

by, Avery Goodman


  • China's central bank is buying huge quantities of gold.
  • China wants the yuan to become a reserve currency, but does not want a "strong yuan".
  • China wants the leverage to control all currency values, which requires control of the gold market.
China has spent the last 6 years importing thousands of tons of gold and buying all of its own domestic production. According to Koos Jansen, the China Gold Association (CGA) Yearbook listed net imports in 2013 at 1,524 tonnes, with an additional 428 tonnes from domestic production, a sum total of 1,952 tonnes. In 2014, China imported at least 1,250 tonnes and domestically mined 452 tonnes, for a sum total of 1,702 tonnes. Total imports amounted to more than 410 tonnes in the first two months of 2015 alone, which is a big jump from 2014 demand.

On April 20, 2015, Bloomberg Intelligence estimated that The People's Bank of China tripled its holdings of gold bullion, since April 2009, to 3,510 metric tons. That means, more or less, the Chinese government has purchased virtually all of its domestic gold production over the last 6 years. The estimate is based on trade data, domestic output and the figures published by the China Gold Association. That means that the Chinese government is the second largest gold-holder in the world, outmatched only by the USA, which claims an alleged hoard of 8,133.5 tons of the yellow metal.

Bloomberg speculates that China is buying gold because it intends to bolster the acceptability of the Chinese yuan in international commerce. The line of thinking is that large gold holdings make currencies more credible candidates for reserve currency status. Yet, a gold-backed currency is not likely to impress the staunchly anti-gold IMF, or increase the likelihood that the Chinese yuan will be added to SDR. Just the opposite.

The IMF was founded by western nations, and the nation with the largest number of voting shares is the United States. For historical reasons, most Western nations, and particularly the USA, continue to be anti-gold. During the 1920s, America gave lip-service to being on a so-called "gold standard". However, in common with most western nations, it printed far more paper money than the gold reserves could back up.

When a recession hit in 1929, national gold reserves could not cope with the increased demand for redemption. By 1933, most western nations ended up defaulting on their gold redemption obligation to individual holders of their currencies. As part of a post-default anti-gold campaign, gold ownership in the USA became illegal from 1933 to 1974. Individuals continued to be subject to criminal sanctions until America defaulted on its inter-governmental gold debts. Post-default relief from pressure on US gold reserves caused American gold trading to become legal again.

This long history of currency and gold standard mismanagement caused the insertion of article 4, Section 2b of the IMF's Articles of Agreement. It specifically prohibits member states from fixing currencies against gold. As a result, with hopes of stabilizing its emerging market currency, instead of fixing the yuan against gold, starting with the Asian Financial Crisis of 1998-1999, China fixed against the US dollar. In July 2005, the "fix" was changed to a managed float. The renminbi strengthened by 21% between 2005 to 2008. In August 2008, the policy changed back again. China 're-pegged' until June 2010 when pressure from the USA caused them to drop the peg again. For more on China's exchange rate policy, see this.

China's fix and/or managed "float" both insure a weak yuan. This causes Chinese goods to be cheaper than similar goods sold by western counterparts. That is a huge competitive advantage. It supports employment and, therefore, political stability. Simply put, so long as the vast majority of Chinese workers are gainfully employed, they are less likely to revolt. The chance that China will suddenly give up a decades-long cheap currency policy, and destroy that stability, is nearly zero. China's leadership is not buying gold to go on the gold standard. It simply wants the power to set reserves and, therefore, currency values, particularly the yuan vs. US dollar ratio.

A recently declassified transcript of a recorded conversation between former US Secretary of State, Henry Kissinger and his Undersecretary for Economic Affairs, Thomas O. Enders, helps in gaining a better understanding of this issue. It reads, in pertinent part, as follows:

Mr. Enders: It's against our interest to have gold in the system because for it to remain there it would result in it being evaluated periodically. Although we have still some substantial gold holdings - about $11 billion - a larger part of the official gold in the world is concentrated in Western Europe. This gives them the dominant position in world reserves and the dominant means of creating reserves. We've been trying to get away from that into a system in which we can control ...

Secretary Kissinger: But that's a balance-of-payments problem.

Mr. Enders: Yes, but it's a question of who has the most leverage internationally. If they have the reserve-creating instrument, by having the largest amount of gold and the ability to change its price periodically, they have a position relative to ours of considerable power. For a long time we had a position relative to theirs of considerable power because we could change gold almost at will. This is no longer possible - no longer acceptable. Therefore, we have gone to Special Drawing Rights, which is also equitable and could take account of some of the less-developed-country interests and which spreads the power away from Europe. And it's more rational in ...

Secretary Kissinger: "More rational" being defined as being more in our interests or what?

In other words, whoever controls the price of gold against their own currency controls the price of gold against any other currency that gold is denominated in. When China increases the number of yuan it takes to purchase one ounce of gold, the dollar will respond by rising in value, even though China will not be pegging its yuan directly against the dollar. The dollar's rise could only be capped by a concerted effort by the USA.

Control over the worldwide currency markets is why China wants to control the gold market. It is already taking affirmative steps to establish that control, and that is what is behind the announcement that the Shanghai Gold Exchange will establish a yuan-based gold fix before the end of 2015. The chairman of the SGE, Xu Luode, has been not been shy about it. He has very openly stated that China intends to control the gold market. He stated:

The international board will form a yuan-denominated gold price index system named "Shanghai Gold". Shanghai Gold will change the current gold market "consumption in the East priced in the West" situation. When China will have a right to speak in the international gold market, pricing will get revealed.

The yuan-based gold price, in other words, will be set at the SGE, which is nothing more than a clearing house similar to exchanges in the West, in that it is sponsored by banks. The difference is that the Shanghai Gold Exchange is sponsored by Chinese banks with direct government support. Even in the $5 trillion + London currency and gold markets, which are supposedly the most transparent in the world, a few large banks managed to manipulate and control the price of both gold and paper currencies. These banks are even now paying multi-billion dollar fines to various regulators, in an attempt to avoid prosecution.

In contrast to the predominantly private London banking structure, the largest most important banks in China are key tools of central planning and largely state-owned. Yet, under the guise of a "free market", the Chinese government will set the price of gold. The "market", indirectly controlled by China through its state-owned banks, is a convenient mirage. China's leaders will be able to unilaterally increase or decrease the yuan based gold price. The exchange rate, therefore, between the yuan and US dollar must automatically change too, because both currencies denominated against gold.

If China increases the number of yuan required to buy a troy ounce of gold, for example, the USA must allow the dollar gold price to rise with it. If not, the yuan will fall against the dollar. In other words, China will determine the value of the US dollar on world markets, not the USA. That shifts the power and leverage away from Washington DC and toward Beijing, and will have a dramatic effect on the financial strength of the US government.

Signeurage is the revenue arising out of creating money. This is because it costs nearly nothing to print paper money, and even less to "print" its electronic version. Yet, this money can be used to buy real things, like oil, houses, cars, plant and equipment. As the printer of the world's reserve paper currency, the USA receives a huge signeurage payment every year. The dollars are printed, used to pay for stuff purchased from foreign lands, and then stored overseas in various places, including central bank vaults, and the mattresses of Russian babushkas.

Every nation and person buying dollars and/or dollar denominated bonds gets to pay, in part, for America's social programs, newest aircraft carriers, stealth fighter jets, drones etc.. Worldwide financial instability since 2008 resulted in the absorption of about $3 trillion dollars newly printed by the Federal Reserve, for one example. The US government has had the benefit of the equivalent of hundreds of billion dollars every year. It will be hard, maybe impossible, to replace that income.

The ancient Chinese strategist, Sun Tsu, is clearly the inspiration for China's massive gold accumulation. If you read his famous book, The Art of War, you may note that he recommended destroying enemies by attacking their economic base, rather than by mounting overt physical attacks. That is exactly what China is doing to the USA. America's policy-makers have stumbled into China's trap.

Once China has enough gold, it will bid up the yuan-denominated price into the stratosphere. Once it does that, there are only three choices. First, maintain credibility and the reserve currency status by refusing to change the price of US dollar denominated gold. If it does that, domestic industries will be crippled by Chinese competition, because the yuan will become very cheap in relation to the dollar. Second, allow the dollar denominated price of gold to skyrocket in synch with the yuan denominated price. That will end the US dollar's reserve currency status. Third, kow-tow to Beijing, seeking a seal of approval from China for any serious financial maneuvers.

None of America's choices are good ones. At this point, no matter what the USA does, China wins. Making things worse is the fact that it will be nearly impossible to prove China is a "currency manipulator" based on the IMF rules. China will simply point to the SGE, explain how the price is set by supply and demand, and win any arbitration brought against it.

It is impossible to know the exact date China will launch its final effort to strip America of its power and authority in the world. But, the current massive gold buying is clearly the main step necessary to do so. China is determined to take power, revenues and international leverage away from the USA. Meanwhile, hapless US policy makers appear to be blissfully unaware of what the Chinese are planning.


Avery B. Goodman has been a licensed attorney for 29 years, and has concentrated in securities law related cases. He holds a B.A. from Emory University, where he concentrated on history and economics. He also holds a Juris Doctorate degree from the University of California at Los Angeles Law School and is a member of the Bar, licensed to practice law in several jurisdictions.

Mr. Goodman serves on the roster of neutral arbitrators of the National Futures Association (NFA) and the Financial Industry Regulatory Authority (FINRA). His career has consisted not only of prosecuting cases on behalf of clients, but also in sitting in judgment on the cases involving others, and making important decisions on intra-industry and customer disputes.

An independent investor for decades, Mr. Goodman has observed that markets are being subjected to frighteningly high, and still rising, levels of disinformation. Investors desperately need an impartial voice of logic, reason and common sense to guide them. For that reason, he is now sharing thoughts with the community at Seeking Alpha.

About the Author

turd [at] tfmetalsreport [dot] com ()


May 14, 2015 - 1:27pm


Sure isn't to help the US.

2c piece
May 14, 2015 - 2:07pm

Trying to help Marchas

Helping Marchas get to his favorite 4th position.

Didn't someone once say that the golden rule was that he who controls the gold makes the rules?

May 14, 2015 - 2:09pm

I'll take third so Marchas45 can

slide right into 4th

Hope those deals hang together so you can convert some fiat to real money


Chuck Diesel
May 14, 2015 - 2:23pm


I submitted this in the comment section on Seeking Alpha, but I'll ask it here as well. From the article:

"Once China has enough gold, it will bid up the yuan-denominated price into the stratosphere. Once it does that, there are only three choices. First, maintain credibility and the reserve currency status by refusing to change the price of US dollar denominated gold. If it does that, domestic industries will be crippled by Chinese competition, because the yuan will become very cheap in relation to the dollar. Second, allow the dollar denominated price of gold to skyrocket in synch with the yuan denominated price. That will end the US dollar's reserve currency status. Third, kow-tow to Beijing, seeking a seal of approval from China for any serious financial maneuvers."

Does this assume the Yuan remains loosely pegged to the dollar? Or does it mean China de-pegs prior to bidding up gold denominated in Yuan?

For argument's sake, let's say 1 USD = 1 Yuan to represent the current peg and gold is priced at $1,000/oz. China now has "price setting power" for gold and decides that gold is now worth 10,000 Yuan/oz. Will the U.S. allow the dollar price of gold to rise to $10,000/oz? If it does not, then clearly an arbitrage opportunity exists if the peg is maintained (exchange 1,000 Yuan for $1,000 USD, buy an ounce of gold in dollars, then sell it in China for 10,000 Yuan). Obviously that will last for less than a millisecond as investors/computers close the arbitrage. But my question is, How does the arbitrage get resolved? If the U.S. "forces" the dollar price of gold to stay at $1,000 then it must remove USD from the system (ie. strengthen the currency). If the USD-Yuan peg remains in place, then would the Yuan not strengthen concurrently? If China removes the peg, then the still the Yuan will strengthen given the country's vast gold hoard.

Sorry if I'm rambling, but I'm trying to play out the author's arguments in my head

May 14, 2015 - 2:27pm

The Sun Tsu strategy

"Once China has enough gold, it will bid up the yuan-denominated price into the stratosphere."

Where have we heard that before?......Ahh yes, Mr Willy.

As I recall he then said "arbitrage that you WS SOB's"

May 14, 2015 - 2:54pm

No arbitrage

" then clearly an arbitrage opportunity exists if the peg is maintained (exchange 1,000 Yuan for $1,000 USD"

The currency peg is not maintained. Gold is the currency par excellence at the bottom of Exter's pyramid. The fiat crosses will adjust based on the increasing Yuan price for gold to maintain their current relationship. A fiat that does not change it's price for gold would strengthen against the Yuan. Their would still be no arbitrage because the fiat cross relationship would be based on the gold price.

In effect Goodman is arguing for an indirect gold standard based on pricing. Isn't this a bit like freegold?

Chuck Diesel
May 14, 2015 - 3:06pm


Thanks for your reply. So would China drop the peg prior to announcing a new Yuan-denominated gold price? I'm curious as to the sequence of events. Many have argued that China will drop the peg anyway given their desire to be included in the SDR basket. If so, then it will happen this year regardless of any changes to Yuan-denominated gold pricing

May 14, 2015 - 3:14pm

We've seen this before

As I argue above Goodman proposes a nuanced gold standard. While the Yuan would not be backed by gold or valued at a fixed amount of gold it would still control the valuation by being prepared to pay a higher price.

I'm reminded of the Silver Purchase Act of 1934, passed when China was on a silver standard while most of the world was on a gold standard. The increased silver price caused deflation in China and abandonment of the silver standard.

"The Silver Repurchase Agreement raised the world price of silver, and silver production increased in the United States. Rising silver prices put a hardship on the handful of countries still on a silver standard because it made the exports of these countries more expensive to the rest of the world, forcing these countries to undergo domestic deflation to remain competitive worldwide. China abandoned the silver standard in November 1935 and Mexico began exchanging its silver coins for paper."

Payback is a bitch!

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May 14, 2015 - 3:26pm

Chuck Diesel

"So would China drop the peg prior to announcing a new Yuan-denominated gold price?"

China needs to drop any peg to the US to be included in the SDR, otherwise it makes no sense as the effect would be to increase the effective US $ contribution to the SDR basket.

There is no need to announce a new gold price, it's a separate issue from fiat interconversion. Mr. Goodman argues that they can increase the Yuan price on the exchange (gradually or dramatically) and the effects he states will necessarily follow. Given the Chinese style I'd suspect a gradual rise.

So all fiats will then relate more to the increased gold price set by the Yuan and not US $ based (will wait to see if SS121 has this interpretation).

Dyna mo hum
May 14, 2015 - 4:50pm


Sun Tzu quotes (showing 1-30 of 410)

“Appear weak when you are strong, and strong when you are weak.”
Sun Tzu, The Art of War

tags: deception, life, war



“The supreme art of war is to subdue the enemy without fighting.”
Sun Tzu, The Art of War

tags: diplomacy, strategy, victory, war



“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”
Sun Tzu, The Art of War

tags: strategy



“Let your plans be dark and impenetrable as night, and when you move, fall like a thunderbolt.”
Sun Tzu, The Art of War

tags: business, strategy, war



“Supreme excellence consists of breaking the enemy's resistance without fighting.”
Sun Tzu, The Art of War

tags: politics, success, war



“Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win”
Sun Tzu, The Art of War

tags: strategy



“All warfare is based on deception. Hence, when we are able to attack, we must seem unable; when using our forces, we must appear inactive; when we are near, we must make the enemy believe we are far away; when far away, we must make him believe we are near.”
Sun Tzu, The Art of War

tags: deception, strategy, tactics, war, warfare



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