Wondering why gold at $1850 is cheap, or why gold at double that price will also be cheap, or frankly at any price? Because, as the following leaked cable explains, gold is, to China at least, nothing but the opportunity cost of destroying the dollar's reserve status. Putting that into dollar terms is, therefore, impractical at best, and illogical at worst. We have a suspicion that the following cable from the US embassy in China is about to go not viral but very much global, and prompt all those mutual fund managers who are on the golden sidelines to dip a toe in the 24 karat pool. The only thing that matters from China's perspective is that "suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar's role as the international reserve currency. China's increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB." Now, what would happen if mutual and pension funds finally comprehend they are massively underinvested in the one asset which China is without a trace of doubt massively accumulating behind the scenes is nothing short of a worldwide scramble, not so much for paper, but every last ounce of physical gold...
3. CHINA'S GOLD RESERVES
"China increases its gold reserves in order to kill two birds with one stone"
"The China Radio International sponsored newspaper World News Journal (Shijie Xinwenbao)(04/28): "According to China's National Foreign Exchanges Administration China 's gold reserves have recently increased. Currently, the majority of its gold reserves have been located in the U.S. and European countries. The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold's function as an international reserve currency. They don't want to see other countries turning to gold reserves instead of the U.S. dollar or Euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar's role as the international reserve currency. China's increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB."
Perhaps now is a good time to remind readers what will happen if and when America's always behind the curve mutual and pension fund managers finally comprehend that they are massively underinvested in the one best performing asset class.
As the old investing guru Marty Zweig used to be fond of saying "Don't Fight the Fed." This was advice based on the idea that the Fed (Federal Reserve) had way more bullets than anyone else, so "fighting" them would be suicide. But in this case the fed is clearly outgunned by China and the Eastern bloc nations, who hold all its debt.
In this case, the Fed is fighting China, and it will lose. I want to go with the winner here.
Did you get the above? This is not just monetary, not just banking, not just some accountant with a visor cap and a gooseneck lamp poring over columns of figures. This is worldwide political machinations, power struggles, and entire nations vying for supremacy. One nation has transferred almost its entire manufacturing base to the other, borrows money from the other, and has the world's reserve currency. The upstart nation has the mightiest industrial capacity in the world (and is growing), owns the debt of the former nation, and most importantly, BELIEVES THAT THE FORMER NATION IS ATTEMPTING TO SUPPRESS THE PRICE OF GOLD TO KEEP THE DOLLAR AS THE WORLD'S RESERVE CURRENCY. It is openly buying gold in an attempt to undermine the dollar and replace the dollar with the yuan.
In one sense, it does not matter what happens between China and the US, as far as "who wins." To me it seems pretty clear that China will win, but the real winner will be the holders of gold.
If China is correct - and I think they are - the spectacular losers will be those who hold dollar denominated assets.