While gold has been falling since October, China has been establishing itself as the major player in the world market for The Yellow Metal.  The heavy buying from the People’s Republic is taking place at both the macro- and micro-level.  The People’s Bank of China has been buying very aggressively in what appears to be a hedging maneuver for its monetary policy positions in The Yellow Metal and US Dollar instruments.  Is this continues, the price of gold could rally this year.

This buying of The Yellow Metal by the People’s Bank of China is coupled with the large production of gold in the country.  What China produces in The Yellow Metal within its borders goes directly to the underground vaults of the federal government.  Imports through Hong Kong are also rising.  According to the Hong Kong Census and Statistics Department, the People’s Republic imported 834.5 metric tons of gold in 2012.  That is almost twice the amount for 2011 of 431.2 metric tons.

The largest consumer for The Yellow Metal has been Beijing, which is continuing for 2013.  With such intensive buying from the world’s largest economy in terms of purchasing power, it would seem that the Yellow Metal should be in line for a rebound.  Bullionvault recently tweeted:  “Miserable Eurozone data and new #gold demand stats see gold-price rally. Japanese net buyers for 1st time since '05”

But as the chart below reveals, the primary support line for gold (dashed blue line) has collapsed.


As China has demonstrated before in commodities markets for copper, corn, and cotton, it has both the desire and means to manipulate the prices for financial gains.  With Beijing building up its stockpiles of gold through both internal production and external purchases, there is every reason to suspect that the mother of all short squeezes could be coming for gold as happened with copper back in late 2011.

Further evidence of this is demonstrated by the People’s Republic stepping back from US Dollar assets.   China now owns about $1.17 trillion in US Treasuries.  Two years ago, China owned $1.16 trillion in US Treasuries.    In two years, the People’s Bank of China has increased its gold holdings while doing very little to expand its portfolio of US Treasuries.  This was a trend for other central bankers in 2012 as the most gold was purchased in almost 50 years by the governments of the world.

This is a prudent measure for long term gains as when gold rises, the US Dollar traditionally falls in value.  That means that China’s accumulation of gold is hedging its massive horde of US Dollar assets from declining further in value.  As the Renminbi has risen in value 33% against the US Dollar since 2005, that reinforces the economic justification for China moving to increase in gold holdings, too.   This allows for Beijing to have a currency and gold position that protects against the currency manipulation of the Federal Reserve in the form of its quantitative easing policies.

As Federal Reserve Chairman Ben Bernanke has committed the United States to quantitative easing in the amount of around $1 trillion annually for an unspecified time period, it is likely that Beijing will continue to accumulate gold as a hedge against the Greenback falling in value.  This demand from the People’s Republic could reverse the downward price direction of The Yellow Metal in 2013.

Marcus Holland

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