Most commentators do not expect China to reduce their US Treasury position during this period of trade tensions, since they posit that that would result in a higher Reminbe, and hurt China trade.
WRONG! Well I should say in theory, WRONG but in practice China is left with the choice of what to do with those proceeds which will in fact limit the amount of sales.
Why the assumption that proceeds from the sale of US Treasuries would go back into China’s currency? Well, the theory and the truth is that China does own so much of the US Treasury market that there really is no other place to go in size other than back into the local currency. BUT ON THE MARGIN, as with Russia, I believe China will put these proceeds into gold.
I believe we are at that point where Gold will finally be elevated to the position of THE TRUE WORLD CURRENCY. Not only has Gold been the world’s store of value throughout history but central banks have been big buyers and, importantly, GOLD IS IN LIMITED SUPPLY. Isn’t that a dramatic contrast with the world’s currencies, which in fact are made from paper and the printing press?
This developing bull market in gold will significantly re-rate the precious metal, which will not be a function of crisis, or inflation, or a weaker dollar, but simply a statement of, let’s call it, “reality.”
One of the themes behind bitcoin, though I am not necessarily associating gold with bitcoin, is that there is a limited supply of 21 million coins. Well, Gold’s annual production ... and here we are talking “reality,” including recycling is about 150,000,000 ounces. In the context of the world’s money supply that is tiny. It’s a well-known fact for example, that all of the gold ever produced throughout history would fit into two Olympic sized swimming pools.
Gold’s annual supply is worth about $180 billion. That is not a lot in the context of world money flows.
It would for example, be an interesting exercise to add up the value of all of the world’s paper currencies and to compare that to this annual number. It would also be interesting to apply an inflation rate of 2% to this total supply of world currency. I’m sure that 2% number would vastly dwarf the value of gold’s annual supply.
So let’s get back to China. China’s Treasury position does in fact dwarf the total gold available each year so it is not realistic to expect that a significant sale of Treasuries could go into gold. But whatever the market can absorb will be purchased by China, and Russia and the world’s central banks as they seek to diversify out of money made from trees.
SO HERE IS THE MESSAGE... THERE IS NOT ENOUGH GOLD TO SATISFY CHINA’S INTEREST IN DIVERSIFYING OUT OF TREASURIES, OR RUSSIA’S, OR INDIA’S OR THE OTHER WORLD CENTRAL BANKS. AND WHAT ABOUT INVESTORS?
Before it’s over Gold will be in the many thousands of dollars.