Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

China’s Appetite for Gold Far From Subsiding

Thursday, April 5th, 2012
By for Profit Confidential

China’s appetite for gold bullion will not subside anytime soon.

I’ve been writing for some time now, dear reader, about China’s desire to see the yuan (also referred to as the renminbi) become a global currency on par with the U.S. dollar and the euro. Combined with this desire is the need to back the currency with enough gold bullion, again on par with the euro and the U.S. dollar.

The 17 countries of the euro combined hold 10,401 tons of gold bullion, while the U.S. holds 8,133 tons of gold bullion and China sits with just 1,054 tons of gold bullion. China has a long way to go to reach the level of the other two major currency blocks.

However, make no mistake about it; China holds probably close to double the amount of gold bullion the country says it does, simply because it has been accumulating so aggressively. The proof is in the recent development, which continues to point to China’s determined inroads to have its currency used internationally.

These moves are not a good sign for the U.S. dollar longer term, dear reader. These countries have made a conscious decision to trade in their own currencies, which means that, while they used the U.S. dollar as the means to settle contracts in the past, they are now going to use the yuan.

Australia views China as its most important trading partner. For the first time in its history, Australia has signed a currency agreement, initially beginning at $31.0 billion, but which will expand. The future agreements and contracts will be settled in yuan.

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After the signing of the agreement on Christmas Day of 2011, Japan has initiated the first steps in buying 65 billion yuan worth of Chinese government bonds. China is Japan’s largest trading partner, but only a very small portion of their trade was settled in yuan. That is officially set to change, at the expense of the U.S. dollar.

Dubai’s Emirates NBD, the largest bank in the United Arab Emirates, has sold its first debt in Chinese yuan in its history. Although it is only for $119 million, this is the first such debt in the Arab gulf region to be denominated in yuan. The United Arab Emirates and China have signed an initial agreement of $5.5 billion as trade, debt and investments are settled in yuan, instead of the U.S. dollar.

In July 2012, the Hong Kong Mercantile Exchange is planning to launch yuan-settled gold bullion and copper futures contracts. Over the next year, the exchange is looking to offer another 12 industrial metals futures contracts denominated in yuan. This would be the first of its kind in Asia. Although they have already launched gold bullion and silver bullion futures contracts in Asia, these contracts are settled in U.S. dollars.

The above is more proof of China’s aggressive moves to make its yuan an international currency at the expense of the U.S. dollar. Since China is clearly serious about this objective, it is going to need a lot more gold bullion with which to back its yuan.

If you’re wondering who is buying gold bullion on those price dips, wonder no longer.

Where the Market Stands; Where it’s Headed:

It’s been a difficult couple of days for the stock market. After the Dow Jones Industrial Average hit a multi-year of 13,297 on Monday, April 9, 2012, almost 300 points evaporated in the two following days.

Is the market rally over? No, I do not believe it is. We are getting near a top in the bear market rally that started in March of 2009, but we are not there yet. Aside from the Internet-related stocks, we have yet to see the heavy signs of speculation or bullishness that usually accompany market tops.

What He Said:

“When I look around today, I see falling stock prices…I see falling house prices…and prices for retail goods stores declining. The media has it all wrong blaming (worrying about) inflation. In my opinion, the single biggest threat to the U.S. economy and to the Fed in 2008 is deflation. You can bet the Fed will expand the money supply and drop interest rates aggressively as deflation starts to rear its ugly head.” Michael Lombardi in PROFIT CONFIDENTIAL, December 17, 2007. Michael was one of the first to warn of deflation. By late 2008, world economies were embedded in their worst state of deflation since the Great Depression.

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles