China Sells U.S. Treasuries, Yields Collapse…. China Buys Gold, Prices Collapse…. “Markets” At Work??

(By Chris Hamilton)

China, the largest buyer of US Treasury’s ceases buying Treasury’s…and US Treasury yields collapse?!? The Chinese (and others) buy record amounts of gold and create an imbalance of demand over available supply…and prices collapse?!?  These are clearly not the actions of a market attempting to find a balance between price, supply, and demand.

July ’11 to December of ’14, China decreased its holdings of US Treasury debt by $71 Billion (according to the most recent TIC data)…while China continued to run record trade surplus’ with the US. China took in excess of a trillion new dollars since August of 2011 through 2014 and simultaneously sold or rolled off $71 Billion in US Treasury holdings…so China had to find a home for nearly $1.1 trillion new dollars.  The chart below highlights China’s annual trade surplus with the US, annual Treasury purchases, and total Treasury holdings.

CHINA #1

(Source: US Census, Trade, Source, Treasury, TIC report)

From ’00 to ’11, China had (on average) recycled 50% of its trade surplus dollar reserves into Treasury’s. However, as noted above, China has been a net seller since July ’11…why is this date important? It was the month of the US debt ceiling fiasco…and the date when China’s purported gold purchase binge began. It’s also August ’11 that gold hit its peak price and has fallen since. I don’t think these happenings were a coincidence.

Since we know China didn’t buy Treasurys over this period, perhaps we should speculate what those new dollars would do if focused on gold purchases?!? If China rotated the 50% of surplus dollars it had been utilizing to buy Treasurys and instead bought Gold…at an average of say $1500 an ounce since August ’11…that would buy China 10,000 tons of gold by year end 2014. Hmmm…Implications abound.

According to the World Gold Council (WGC), China’s gold demand rose from 300 metric tons up to 1300 metric tons in 2013 and about 1200/mt as of 2014. This is important as WGC reporting nets all newly produced global mine supply, global recycled scrap, and (based on the above WGC data on Chinese demand) denotes that the gold market is in balance between global supply and global demand. However, based on the data from the Shanghai Gold Exchange (SGE), the central clearing house for all Chinese gold purchasing, China’s demand is far greater (the chart below highlights the discrepancy). But if the data from SGE is correct, then where did all the additional gold come from and why did the price collapse on record demand? The answer is almost certainly, the gold was imported from someone else’s inventories willing to sell something of great value at low prices. But according to the SGE data, the Chinese demand was about 2,700 metric tons greater than global available WGC available supply since July 2011 (3.5 years) or about 771 tons annually. In the prior 3.5 years, the WGC and SGE had only diverged by about 600 metric tons or a 171 ton differential annually. So, China had massive dollar reserves not utilized to buy Treasury’s and someone sold a lot of gold to China and in the process drew down their own inventories as the demand was far greater than mining supply!

CHINA #2

Who would have this massive amount of gold in inventory (and willingly sell it at significantly lower prices) and why would the price of gold collapse on this clear imbalance in demand over supply? Most sources of potential inventory are audited on a regular basis and this draw-down would be quite noticeable. Of course, the greatest source of gold holdings are collectively held by the Federal Reserve and the US Federal government…and this is not openly audited.

Some questions spring to mind! 

From ’08-’09, could China and the US agreed to perform the thousands of years old activity of recycling excess currency, officially purchasing US Treasurys, but quietly and in secret being paid in some sort of gold arrangement? This would certainly serve both parties nicely allowing US deficit spending in an economic downturn without spiking interest rates. China for it’s part would continue its export driven economic miracle.

  • China increased its holdings of US Treasury debt from $65 billion in ’00 to $1,315 billion ($1.3 Trillion) in July of ’11…and in particular, from ’08 to July ’11, China increased its Treasury holdings by $588 billion while the US ran massive budget deficits flooding the Treasury market with new supply…and China’s trade surplus with the US ebbed on lower US consumer demand during the ’08 through ’11 economic slowdown (said more plainly, China bought more when they had less with which to make those purchases).

Since July ’11 China has net sold $71 billion in US Treasury debt on record dollar trade surplus in excess of a trillion dollars.

  • China as of July ’11 suddenly changed course with their dollar surplus even as their trade surplus with the US reached new records annually over ’12-’14?  Did China suddenly decide gold was valuable and begin buying in the open market?  My guess is China believed gold was of value all along but once the gold was no longer available (perhaps the US ran out or simply determined, like Nixon in ’71 (who watched almost 60% of US gold depart in the prior decade) that closing the gold arrangement, was essential to save whatever gold reserves the US had left).

Put it all together…China, the largest buyer of US Treasury’s ceases buying Treasury’s…and US Treasury yields collapse?!? The Chinese (and others) buy record amounts of gold and create an imbalance of demand over available supply…and prices collapse?!?  These are clearly not the actions of a market attempting to find a balance between price, supply, and demand.

Of course I can’t prove that China did purchase any amount of gold. The Chinese authorities haven’t made any updates since 2009 when they last made public a 600 ton increase (to their then official holdings of 454 tons) to the current official Chinese gold reserve of 1054.1 tons. What I can say is Russia, which likewise has a large dollar trade surplus and likewise to China has been reducing its Treasury exposure since August of 2011…has been busily and openly adding to its gold reserves, now up to 1153.3 tons. Then again, I (nor the US government?) can’t prove the US truly has 8133.5 tons. Or the Germans 3384.2 tons or Italians 2451.8 tons. Still waiting on those open and transparent audits.

All I can say is the above math regarding China’s dollar hoard would nicely support what is visible in the chart below and also support those that claim Chinese gold buying and gold reserves are far larger than advertised.

CHINA #3

This article was written by Chris Hamilton at the econimica.blogspot.com.

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30 Comments on "China Sells U.S. Treasuries, Yields Collapse…. China Buys Gold, Prices Collapse…. “Markets” At Work??"

  1. Short paper gold, buy DAX / Nikkei and S&P. The price of gold is the paper price, 100x leveraged and measured in fiat currencies. Price discovery is a fools game; keep stackin’. 🙂

  2. China is the most populous country in the world with a population close to 1.3 billion. If China accumulated 1,300 tons of gold, this translates to 1 gram or 0.0321 ounce of gold per capita. Is that really lots of gold ? No, this is peanuts in comparison to Switzerland which has a similar gold reserve of 1,040 tons but a population of less than 13 million which translates into more than 2.5 ounces of gold or 80 times as much gold as China has on a per capita basis.

    Similarly, China’s huge accumulation of US Dollars (in form of US Treasuries and cash) in the range of $4 trillions or less translates into a sum of $3000 on a per capita basis. Is that really that much money?

    No, this is still peanuts. Any person with total savings of $3000 is poor regardless how these figures are analyzed.

    I think that many people writing about the huge amounts of savings accumulated by the Chinese do not really understand how large the Chinese population is.

    • Robert,

      While your math is correct on GOLD VALUE vs the CHINA POPULACE, the article is focusing on how much gold the Chinese Govt may have acquired in official reserves. China is reported to announce how much gold they have this spring. We will see.

      Estimates are between 10-20,000 tonnes.

      steve

      • Chinese purchases while very important are due only if it does not harm western comex/lbma leveraged paper schemes.

        2014 have seen lower numbers than 2013 and 2015 will be lower than 2015 : people are now used to the 1200 USD price and even if/when it goes to 1000/1100, it does not mean that buying pressure will increase.

        Despite all what have been written the gold/silver deficit are too low in order to trigger a collapse of the the western paper scam. Indeed, regarding gold : afew hundreds tons deficit will be easily match with central banks/BIS and troubled nations like Ukraine, venezuela,…

        We are back we were a few years ago : it is up to the chinese government and we are still waiting…

    • Rob,
      You are assuming that all the population of China only has a total of $4 trillion dollars. These are the extras. So if you use the same logic. The US deficit is $18 trillion (not including unfunded liabilities) divided by its population of 300 million, the net per person is $-60,000. If $3,000 per person is poor, what do you call a person who owes $60,000? Beyond destitute?

      • Robert Happek | March 18, 2015 at 9:19 pm | Reply

        Mike, the difference between China and the US regarding US Dollar denominated assets and debts is that the US government can easily print the Dollars needed to pay its debts. China can not print Dollars, it can only print Yuan. As Reagan once said, US deficits do not matter. Although not an economist, he clearly understood the essence of government debt.

        Government debts are always issued with no intention of repayment. Britain even has a bond with no maturity at all (called consols). That is the main reason why the amount of public debts outstanding must always increase. Fortunately, we will never reach infinite amounts of debt because the solar system will be history within a few billion years.

        The solution to government debt is obvious. Stop talking about it. Do not publish any data regarding government debt. And let the Fed continue to print. Since a debt certificate is also an asset for the party holding the asset, instead of talking about debt, talk about the growing wealth of the nation. The more debt, the more wealth there is.

        Next step: abolish all currencies and let everybody pay electronically (ATM card of smartphone). Electronic money can be easily controlled, issued and destroyed. Then introduce legislation that regardless how rich, nobody can spend more than $10,000 per month on average. That allows for huge asset inflation with a controlled price inflation. Everybody will be like Warren Buffett who owns billions but spends only $60,000 per year. If we all start thinking like Buffett, we can continue to accumulate wealth for centuries to come as long as we live like Buffett (drinking lots of Cherry Coke every day and eating steak once a week).

        Such a system was practiced in the former Soviet Union. Everybody had plenty of cash but could not buy much because the shops were empty. The ultimate crisis will arrive when essential resources like oil and food become unavailable, Only then will a monetary crisis in form of hyperinflation arrive. Indeed, the Soviet Union collapsed precisely when the country was not able to sell enough oil in order to buy sufficient food on world markets to feed the population. Only then did hyperinflation break out in the collapsing economy. I think we are facing the same outcome.

  3. You are way off. According to Jim Willie, his sources have China’s gold holdings at around 40,000 metric tons. Russia is estimated at over 20,000 metric tons,

    • The number provided by Jim are coming from the saying of only one person.

      Personaly, I would be more comfortable with 10 000 for russia and 20 000 for china, citizens included (about the same for india with a much higher balance in favour of Citizen vs state of course).

      • And Jim has had about an 80 – 85 percent accuracy rate since I have been following him for 15 – 20 years.

        • These numbers could well fall into the 15/20% category. His numbers are just coming from one source with no more evidence than his experience.

    • Robert Happek | March 18, 2015 at 9:30 pm | Reply

      The gold market is the most secretive market in the world. This means that no data regarding the gold market has any credibility regardless of who publishes these data. Jim Willie has not more credibility than the US Treasury which claims to possess over 8,000 tons of gold.

      Even the frequently quoted figure of 170,000 tons of total amount of gold above ground is not credible. There are good reasons to believe that the total amount of gold above ground is at least ten times as large.

      Everybody who owns gold wants to keep that fact secret. Including central banks.

  4. When China says they don’t need copper or iron ore, the truth usually comes out later that they are really buying.
    What is the chances that China is playing a game here–selling gold when they are buying and buying bonds when they are really selling? Market action says so. Their history in other markets suggests so.

    Maybe we have been duped. When it walks like a duck, and quacks like a duck, what is it?

  5. Kingworldnews!Did they ever a right prediction in the last 5 years?

  6. The “proof in the pudding” will be silver, not gold.

    Compared to gold the silver market is tiny, and no central banks have any reserves in their vaults.
    The physical silver market lives from hand to mouth. As the physical supply diminishes and the demand grows ever more, the stress in the market rises.

    Silver is the comex’s and bullion banks true “Achilles Heel”. The breaking point will be when the ‘bid’ receives ‘no offer’. It will be a force majuire and “cash” settlement will be a signal failure.

    • The same thing has been touted by the cowboy…and nothing came.

    • Historically over 90% of the time silver’s price has followed gold’s price.

      There does exists the possibility this time silver could lead all PM’s “out of slavery”.

  7. Totally Minercrash.Each day strong downwards.Who else believe the fairy tail of the safe haven PM?
    The financial system is able to shift the money between stocks and bonds.PM are not needed anymore.
    Only a physical shortage can change the Situation.
    But the miners produce as there is no tomorrow.So we will loose much more.

  8. You need to brush up on your whole perception of this red team vs blue team dichotomy between east and west. It doesn’t exist. They are both colluding now and China’s gold hoarding is all apart of the bigger picture.

    • Maybe so.

      Regardless Asian demand of gold and silver is what will create the major shortages that could be the catalyst for higher prices.

  9. Frankfurt is burning.The vilolence escalated.The euro a Project of Peace.

    http://www.ariva.de/skyline_ffm_a809508

  10. College Student | March 22, 2015 at 12:03 pm | Reply

    In my opinion Gold price will fall sharply at some point. West and Americans will never let Chinese and Russian and Indians to reap the benefits of high price of Gold

    They have sold Gold on high price and will purchase it back on low price.

    In the end Gold hoarders will be looser

    • College Student,

      I must say, a perfectly reasoned comment coming from someone who goes by the name COLLEGE STUDENT. I gather they still teach nothing about money in College these days.

      steve

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