ANALYSIS: BORROWING RATES, GOLD & CHINA….Why the West should join up the dots

I draw your attention to this from Lawrie Williams at his never less than entertaining site:

‘The huge level of weekly Shanghai Gold Exchange delivery numbers is becoming something of a repetitive news item and is perhaps losing its impact, but it shouldn’t.  Week 37 (ending September 18th) saw another 63 tonnes delivered out of the Exchange, which makes the year to date total 1,892 tonnes – 281 tonnes more than at end week 37 in the massive 2013 record year for Chinese gold consumption.  If we extrapolate from the year to date figure this would suggest total SGE gold withdrawals for the year would come to an enormous 2,650 tonnes or higher – equivalent to over 80% of the total global supply of new mined goldWith SGE deliveries usually rising late in the year in the long build-up to the Chinese New Year, which falls on February 8thnext year, we certainly shouldn’t discount the likelihood of this level being achieved, or even bettered.  There seems to be no slowdown happening as yet.’

That narrative paints a somewhat different picture to the one we normally get from the SSE Comp. If the Chinese were – in some unfathomable attack of madness – converting the gold into cash and/or foreign exchange in order to stem market falls and Forex outflow respectively – then it would show up. It isn’t doing that: the Chinese are hoarding the stuff.

Come thick thin rain shine up down in out and even boom bust, buying gold has been a steadfast (and often covert) Beijing policy for many years now. Three months ago, China finally confirmed speculation about its gold hoarding by admitting to a near two-thirds jump in its reserves since 2009. April 2009, reserves were 1,054 tonnes. By end June 2015, they were 1,658 tonnes. But at this point we need to define ‘consumption’: if the reserves are 1.7k tonnes (but 2.7k tonnes are being consumed) then who or what are the consumers?

My own feeling is very simple: as always, Beijing is overstating internal jewellery, cultural et al demand to hide exactly how much is being hoarded. Don’t forget The Slog’s widely ridiculed belief that China’s politburo is equally if not more interested in the geopolitical as it is in the economic….and that, when least expected, it may raise rates.

Foresee with me this bullet-point scenario:

  • China decides to stop using up foreign reserves, and let the SSE Comp do what it must, viz, zoom down towards 2,000 and beyond.
  • This panics the Western markets, setting off a chain reaction that causes major bourse collapses and bank failures across the piece.
  • To exacerbate the West’s catastrophe, Beijing raises rates on bonds guaranteed by gold.
  • A megawave of investment floods back into China, which is in turn used to spend on everything from subsidised rents on millions of empty apartments to First World infrastructural development.
  • The EU implodes as investment drains away, and Beijing is left with a carpetbagger landscape on which to cherry-pick all the assets it could ever desire…and create markets wholly dependent on its goodwill. (It is already doing the same thing in Africa).
  • As the US, UK and EU spiral upwards into galloping hyperinflationary stimulation – in an insane attempt to stop deflation – the effect of this on the financially repressed 97% of the citizenry at last becomes enough to create social violence and, ultimately, sovereign insolvency.

At this point, the accepted ‘rules’ of globalist economics no longer apply: China has lost its Western ‘free market consumption’, but is gold-rich enough to feed and house all its citizens…and has the power to force command consumption of Chinese goods upon those sovereigns forced to sell of their key assets to Beijing. (If you find this far-fetched, look at the way UK Chancellor grovels to the Chinese even today before any of this has come to pass).

There is a factor, of course, called nuclear capability that would probably intervene before such a scenario as I describe pans out. That’s a key reality, but it doesn’t negate the point I’m making here: don’t be narrow in your expectation of the future.

Earlier at The Slog: Plodding through the muddied waters of Europe’s migrant reservoir