Why encouraging the population of China to import gold makes sense

Tuesday, 8 September 2009

Hugo Salinas Price

The big news in gold is that there are signs that the Chinese government is now inviting the Chinese to buy gold and silver.

Some good reasons for China to favor gold purchases by its population:

China has trade surpluses which bring in unwanted additional amounts of foreign currencies and swell China’s already enormous Reserves.

The Chinese are well aware that the foreign currencies with which their exports are paid, are only fiat money payments and that the Reserves to which they give rise are nothing more than shaky investments whose value is at risk – 60 to 70% of China’s Reserves are dollars which are being savagely debased and the euro is not in much better condition.

At the same time, China does not want to undermine its present industry with a revaluation of the Yuan, in order to make its products more expensive in the foreign markets and stem the inflow of foreign currencies by slowing down exports. It absolutely must keep its factories running in order to provide desperately needed employment for millions of Chinese.

China is also averse to importing manufactured goods. It wants to do the manufacturing itself; revaluing the Yuan to make imports more affordable or bringing down trade barriers are not policies it wants to implement.

But importing gold – that’s another matter!

If the Chinese population goes in for importing gold, here are some of the benefits:

China’s favorable trade balance will contract. China’s government likes that – it means less accumulation of unwanted Reserves.

Chinese manufacturing will be untouched by the competition of foreign made goods no matter how much gold comes into China.

As China’s persistent favorable trade balance diminishes, the world will have less reason to complain about an undervalued Yuan. However, China’s exports will continue to thrive because China will leave its exchange rate untouched.

Politically, the Chinese government cannot easily go into the gold market directly to turn its Reserves into gold. This would be considered hostile behavior by the U.S. Government, as undermining the dollar. However, if the people of China go ahead and buy massive amounts of gold and drive the price skyward, the Chinese government can just shrug its shoulders and say, “Sorry, it’s the people who are buying, not us. There is nothing we can do about it.”

Driving the price of gold to the moon does not mean that the dollar, in which that price is expressed, will be devalued all by itself. A rising price of gold means that all the currencies of the world, including the Yuan, are going down in value, not just the dollar.

Adrian Ash, in his article “Galloping Consumption”, at “The Bullion Vault” on August 26, 2009, adds one more reason, given by the McKinsey consultants:

The Chinese have to rely on personal savings for their retirement; they have no social “safety net” to protect them, either Social Security or Pension Plans. This need to provide for the future is very naturally holding back consumption, and China needs a consuming public to absorb production from its factories, which are feeling the slow-down in the rest of the world.

Allowing the Chinese to gorge themselves on gold and build up their savings is the best way to prepare China for future consumption of its own production.