Why the West sells gold and China buys it

Alasdair Macleod – 17th January 2014

A number of readers and bloggers have recently suggested there must be collusion between America and China over the transfer of physical gold from Western capital markets. They assume that governments know what they are doing, so there is a bigger game afoot of which we are unaware.

The truth is that China and Western capital markets view gold very differently. You will hardly find anyone in the London Bullion Market who regards gold as money; and for them if gold is no longer money Chinese demand for it is not a monetary issue. Instead it threatens the bullion banks’ business that a useful financial asset, capable of earning many times its physical value in fees, commissions, turns and interest, is being leeched out of the market by Chinese aunties.

It is clear that nearly all Western central bankers share this view, believing that gold will never play a monetary role again. We also know that Marxist-educated government advisers in China have been sheltered from the Keynesians’ antipathy against gold and instead have been brought up on Marx’s belief that Western capitalism will eventually destroy itself. It therefore follows they believe that western paper currencies will probably be destroyed as well.

Otherwise we can only speculate, but the following conclusions about why the Chinese are accumulating gold seem to make most sense:

  • There is a fundamental view in China that gold is ultimately money, so it is always worth accumulating by selling potentially worthless foreign currency.
  • Encouraging her citizens to accumulate gold achieves two objectives: if they have real wealth to protect it makes them potentially less rebellious in difficult times; and secondly private buying of gold reduces the trade surplus, which in turn reduces the accumulation of foreign currency reserves.
  • Gold is generally accepted as superior money throughout Asia, which is China’s long-term regional interest.
  • The Chinese Government (and/or the Communist Party) is buying gold for itself. Assumptions it will use gold to beef up the renminbi makes little practical sense, beyond perhaps some window-dressing for currency credibility. Instead she appears to be accumulating gold for unstated strategic reasons.
  • Keeping the West short of gold gives China huge leverage in today’s cold currency war, and even more if the currency war heats up.

The idea that America is colluding with China in the gold market must therefore be nonsense. The truth has everything to do with different philosophies about gold.

Advanced western economies have survived without using gold as money for a considerable time. Currency and credit inflation have created a modern finance industry wholly dependent on fiat paper and everyone in mainstream finance is conditioned to believe in the profitable world of fiat currencies. They are therefore predisposed to dismiss gold as never being money again.

That is why the West is less worried about losing physical gold than it should be, and China is glad of the opportunity to buy it. And she can be expected to continue to do so whatever the price, because she knows that in the final analysis gold is the only true money.

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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.

5 thoughts on “Why the West sells gold and China buys it”

  1. Hello Mr. Macleod,

    I agree on the fundamental difference between the Western philosophical view and the Chinese/Asian one. Moreover I agree that a future gold-backed renminbi is only wishful thinking by some analysts. However I am not sure about the possible unstated strategic reasons for their relentless accumulation at the official (central bank) level. Would you care to elaborate or speculate? Maybe they would employ their bullion as medium of exchange to settle big energy-related purchases (oil and gas with Iran and Russia, their allies) in the aftermath of a USD/Western currency collapse? Or maybe have a bigger say and influence at the IMF table?

    Furthermore if we agree the Chinese bullion stockpile will not back their currency then why would it provide huge leverage to them in an overt currency war? I don’t see the Chinese officials spending part of their stockpile in defense of their purely fiat currency. Would they actually implement partial gold convertibility of renminbi (“window dressing” as you nicely put it) in order to bolster confidence in their currency should a currency war break out?

    Kind regards,

  2. I have to take issue with your assertion that “Marxist-educated government advisors” believe that capitalism will eventually destroy itself and that western paper currencies will do likewise.

    China is no more “socialist” than any western social welfare state. It is a centrally-planned economy in macro-level theory. But at the local level it’s a ragingly free enterprise one. The Chinese are born entrepreneurs, paying only the required lip service to official edicts, and no amount of propaganda will ever change the character of a people. I found, during my time there, that the average man in the street ridicules government regulations, dogma, officials and policies.

    Having a drink with a stamp-collecting friend there one day in 1992 I clearly remember a discussion at the table in which the term “socialism with Chinese characteristics” (the official policy explaining Chinese deviations from standard socialism) came up. 中国特色社会主义 My friend asked me “Do you know what that phrase really means?”

    “Capitalism!” he said.

    The Chinese respect gold as incorruptible, honest WEALTH, though the man-in-the-street has never considered whether or not it is “money” or whether western currencies will fail. Government is irrelevant to the question of gold. The importance of wealth, of gold, is a cultural characteristic. And it is no accident that the colours red and gold are pervasive and considered auspicious…

  3. As a European citizen I am amazed about the stupidity of western Central Banks as well as governments that know and have prove over and over again they like to see paper instead of the real wealth gold and silver.
    I am imprest about the quality of thinking in the east (China etc.)and the lack thereof in the western world.
    The arrogance of a scheme that in my opinion is fraud, criminal stealing from savers for the benefit of a few criminals through money printing.
    It’s disgusting were is honesty?

  4. Gold is a strategic metal and currency. By itself means nothing to China. It is part of a grand strategy to become the leading and/or reserve currency. You need the other 3. Largest manufacturing base. Largest positive balance of payments. Blue water navy to ensure trade.

    Private citizens holding gold is like the government holding gold. Remember FDR and 1933…

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