Chinese puzzles

Alasdair Macleod – 20 January 2011

There is one possible solution to the puzzle posed by China over its strategic use of precious metals: she has far, far more gold and silver than we commonly believe. To understand why this conclusion makes sense, we must try to understand her political objectives and where her manipulation of bullion markets fits in.

In the West, we see China as a convert to our capitalism; this view is at best naïve, at worst self-delusion. The Chinese elite do not think like Americans and Europeans, having a different cultural and philosophical approach to both life and matters of state. Furthermore, the cultural revolution of Chairman Mao was more a Marxist revolution, which taught the Chinese a certain style of economics, and that capitalism, being prone to economic crises, is ultimately doomed to failure.

The Chinese do not therefore believe that they should become capitalists, because to do so, according to Marx, would guarantee their own ultimate failure. Rather than commit themselves to the same fate as the West their priority must be to survive the West’s downfall. The whole purpose of China’s industrialisation is geared for that objective. And the capitalists’ extraordinary feats of self-destruction confirm the apparent wisdom of this strategy.

This is an economic war with a passive aggressor: China will let us sink under our own democratic stupidities. She does not need to do much more than protect her own position. The visible manifestation of her strategy is bound up in the rationale behind the Shanghai Cooperation Organisation, which I have written about before, here. The members, associates and observers in this organisation, all of which are Asian (with the exceptions of Russia and Belarus), are China’s future, and nearly all of them are stockpiling gold. Europe and America belong to the capitalist past, and they have been selling gold. The contrast could not be clearer.

Gold is money to the Asian mind, and paper money is ephemeral. Understand this, and you understand China’s view of the dollar and even of her own paper currency. Neither she nor her citizens are fooled into regarding the yuan as a store of value; it is a medium for exchange and just an economic tool for China’s dealings with the West. She does not concern herself unduly with inflation measured in yuan, unless it threatens to destabilise Chinese society; and as we know, China’s masses are now being offered an alternative, they are encouraged to accumulate gold and silver, real money.

We therefore have a logical reason why the Chinese government has been opening up gold and silver markets to Chinese savers. It is an opportunity for them to salt away real wealth, as opposed to paper wealth. China’s people are being offered a golden opportunity, and they are taking it with gusto.

But with declared gold reserves of little more than 1,000 tonnes, one would have thought that encouraging its people to buy gold would work against the government’s own attempts to build gold holdings as part of their official reserves. This is not so, because the Chinese government and communist party own considerably more gold than they publicly admit.

Our goal is to understand the likely quantum of this amount. If we turn to the World Gold Council[i], its estimate of all the gold in the world in the year 2000 was 142,600 tonnes. In the notes on individual country estimates, the WGC estimates that China and Hong Kong held only 100 tonnes between them prior to 1968.

This is barmy. Such an estimate is surely consistent with a lack of data, rather than with reality. It is even inconsistent with the evidence of gold being mined in China today, because we know from mining experience elsewhere that if gold is present now, it would almost certainly have been present in higher concentrations in the past. China has a mining history that stretches back millennia, and what it didn’t mine it obtained through trade, confiscation and the spoils of war. Gold, silver and precious stones were what even Kublai Khan and the Moguls were about, and so was the silk route too.

According to Marco Polo, Kublai Khan, for whom he worked as an envoy, anticipated modern central banks by issuing paper money in return for the compulsory submission of all gold, silver, pearls and precious stones. There was therefore in China at that time almost certainly the largest hoard of gold and silver in the world. And this was over seven hundred years ago.

Marco Polo also recorded that one of China’s trading partners, Japan, had gold “in great abundance because it is found there in measureless quantities”…….”so much indeed that the ruler of the island has a very large palace entirely roofed with fine gold, just as we roof our churches with lead”. In Lokak (Siam or Malaya) “Gold is so plentiful that no one who did not see it could believe it”. At Karajang (the Chinese province of Yunnan – still a gold area today) “Gold dust is found in the rivers, and gold in bigger nuggets in the lakes and mountains”. And there was more.

There is little doubt that Polo gilded his account somewhat, but any gap between his account and reality will have been made more than good by seven subsequent centuries of mining, trading and looting. The Great Khan’s trading connections at that time were far larger than Europe’s, extending from East Africa to Japan, from Europe to Sumatra, and remained so for centuries.

We can be certain that over all the centuries Chinese traders and rulers will have had fabulous quantities of gold, nearly all of which must still exist. From Kublai Khan’s time, a growing hoard will have been handed down from emperor to emperor and dynasty to dynasty. The acquisition of ultimate power is also the acquisition of imperial fortune.

We have no way of knowing how much of this stockpile disappeared in the turmoil after the end of the Qing Dynasty in 1911, but it reasonable to assume that the post-war communists would have made every effort to sequestrate all dissipated gold and silver, both from previous rulers and from merchants exhibiting any signs of wealth. For the purpose of our Chinese puzzle, we shall assume this figure to include at least 10,000 tonnes of gold.

We must then consider gold mining since the communist take-over in 1949. Given that China only tells us what she wants us to know, and that mining output is currently about 300 tonnes, we shall assume an additional stockpile of at least 10,000 tonnes since that date. Furthermore, it is more than likely she has been surreptitiously buying bullion from Western markets as part of her long-term economic strategy, especially when Western central banks were depressing the price with leased gold from the 1980s onwards.

So we should not be surprised if total gold under the control of the Chinese government exceeds perhaps 25,000 tonnes. This is considerably more than the holding of 8,134 tonnes claimed by the Fed on behalf of the US government. If this is true, then China’s economic policy and precious metal dealings begin to make sense. And it makes even more sense given the Fed and other Western banks are claiming to still own gold long since sold, to the point where close observers of bullion markets see a potential supply crisis developing.

China approaches puzzles with Confucian patience, and has no interest in precipitating any crisis. She wisely knows she has to live with the consequences of her actions. If the Western banking system falls apart as a result of its gold suppression schemes, she will play no part in its downfall or rescue, nor will she be seriously harmed. Will she bail out the West’s short position in precious metals? Not on your life. But she will spend some of her paper currency playing the nice-guy to keep an illusion of cooperative friendship going: hence her helping hand this week when she bought some Portuguese debt.

Meanwhile China has quietly unleashed the savings of her citizens into the bullion markets. By this important move China is using private wealth to squeeze the West at its most vulnerable point, and one can only guess at the eventual result of this manipulation. Perhaps her end-game will be to copy Kublai Khan, call in all her citizens’ gold and silver and issue them with new paper receipts.

Maybe this will become the new currency for the Shanghai Cooperation Council. If so, that is the final solution to an even bigger Chinese puzzle.


[i] See “Retail Gold Investment and Private Sector Stocks – a Review” prepared for the World Gold Council by Gold Fields Mineral Services Ltd, available on to registered visitors.

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Alasdair started his career as a stockbroker in 1970 on the London Stock Exchange. In those days, trainees learned everything: from making the tea, to corporate finance, to evaluating and dealing in equities and bonds. They learned rapidly through experience about things as diverse as mining shares and general economics. It was excellent training, and within nine years Alasdair had risen to become senior partner of his firm. Subsequently, Alasdair held positions at director level in investment management, and worked as a mutual fund manager. He also worked at a bank in Guernsey as an executive director. For most of his 40 years in the finance industry, Alasdair has been de-mystifying macro-economic events for his investing clients. The accumulation of this experience has convinced him that unsound monetary policies are the most destructive weapon governments use against the common man. Accordingly, his mission is to educate and inform the public in layman’s terms what governments do with money and how to protect themselves from the consequences.

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