Why Is China Buying Gold?

Eric Fry, reporting from Laguna Beach, California…

Hey Rude readers, can you see the chart below? The Chinese can see it to…and that may be a big part of the reason why the gold price keeps marching steadily higher.

The Chinese can see that U.S. dollars – like all the rest of the world’s paper currencies – tend to lose value over time…lots of value. The Chinese can also see that the current crop of American leaders is implementing policies that will likely accelerate the dollar’s decline.
American politicians, Federal Reserve appointees and Treasury officials are united in their efforts to counteract the forces of recession. Their weapon of choice: dollar debasement. From behind the ramparts of New Era acronyms like “TARP” and New Era euphemisms like “quantitative easing,” the Fed and its comrades-in-arms hurl trillions of dollars of currency and credit toward the enemy…hoping to scare it into retreat.

So far, the enemy seems unfazed. Recession continues to advance, even though the battlefield is littered with Private “Benjamins.” Therein lies the problem for the U.S. economy. Even if the Fed manages to repel the forces of recession for a while, the cost to our beloved dollar could be incalculable. In other words, we might win this particular battle, but we are likely to lose the war. The more dollars the Fed catapults into the banking system, the greater the risk that hyper-inflation will ensue.

Several high-ranking Chinese officials fear such an outcome…and they are not afraid to say so. In mid-February, Zhou Xiaochuan, the Governor of China’s central bank wondered aloud, “Is it time for China to consider using its reserves somewhere else, instead of concentrating too much on the United States?”

One month later, Premier Wen Jiabao remarked, “I am a little bit worried. I request the US to maintain its good credit, to honor its promise and to guarantee the safety of China’s assets.” A few days prior to this statement, Luo Ping of China’s Banking Regulatory Commission offered a less delicate version of the premier’s remark: “Once you start issuing $1 to $2 trillion [of Treasury bonds], we know that the dollar is going to depreciate. So we hate you guys, but there is nothing much we can do.”

Nothing much, perhaps…but something, nevertheless. The Chinese can diversify a portion of their reserves into gold. And that’s exactly what they appear to be doing. Even a modest re-allocation to gold could produce a meaningful rise in the gold price…and that’s without including growing demand from the rest of the world’s dollar-phobes.