Guest Post from David Smith, Originally Published on Money Metals Exchange

Money Metals readers may remember my November 2014 report in which I discussed how gold flowed into China in “tributary fashion” like small streams flowing into a giant one. In this case, the gold has been streaming into China’s increasingly massive thousands-of-tons gold hoard.

MD: Is the same not true for India … whey they use it for making jewelry? If that flow was grain into silos would it be any different (assume nitrogen filled silos with zero leaks)? The point being … gold and grain are just stuff. If a country chooses to hoard it, why are they doing that? It’s not because it is money … because neither are money. And when it hits the fan, they’re going to try to trade their gold for food anyway … so why not just hoard the food? What are you trying to accomplish by hoarding gold. If you have all of it, it is, by definition, worthless in trade. You only have to know what money is for that fact to be obvious. Take it to the limit. If there is zero gold available to traders for making trades over time and space, they’re going to use something besides gold.

In January, 2015, I penned an essay titled “China’s Global Gold Supply “Game of Stones” outlining China’s long-range goal to dominate the world’s physical gold market.

Well, events have moved massively forward since then. I want to update you as to just how much things have changed – and how close we may be to experiencing a “defining moment” in the gold market.

I’m talking about a game-changing event that could, with little warning, propel the price of gold upward by hundreds – even thousands – of dollars per ounce in the space of a few weeks… conceivably overnight! (And since silver’s price movements are highly correlated with that of gold, we could expect an upside explosion in silver as well.)

MD: Would it propel all money in the world by the same factor … or does it just apply to dollars? How about the Yuan?

China’s 4-pronged gold accumulation strategy:

 

First: Buy physical gold in world markets, re-fabricate it when necessary (into .9999 fine bars in Switzerland), and ship to the mainland.

MD: Why do the refining in Switzerland?

Second: Hoard all domestically-produced gold… which is now being done, even when produced from operations with foreign-partners. This is also true with silver production, e.g. Silvercorp Metals – a Canadian silver/lead producer with operations on the Chinese mainland.

MD: Keep in mind there is only 1oz of gold per person on Earth … regardless of where it is located. And the hyperbole of including silver is silly. In aggregate value for silver, there is 1/5 the aggregate value of gold in the world. So we’re talking about 1.25 oz of gold equivalent per person on Earth. Adding silver to the mix doesn’t change the story at all. Recognize hyperbole for what it is … gilding the lilly.

Third: Partner with (e.g. Pretivm Resources; Barrick Gold-Pascua Lama) or buy outright, gold explorer-producers located on foreign soil.

Fourth: Purchase for cash, gold production “off the books” from ‘informa’ miners in S.E. Asia, Africa, and South America. China’s intent is to supplant the U.S. as the largest holder of physical gold (claimed to be around 8,000 metric tons) on the planet. (Disclosure: I, David Smith, have held for several years, positions in Silvercorp and Pretivm, purchased in the open market.)

Right now, China is vastly understating what it actually holds as well as how much is being imported.

This deception is easier than ever because a significant amount is no longer routed (and thus reportable) through Hong Kong, but rather through other mainland entry ports. What the authorities admitted holding as of last summer was almost unbelievably small compared to what even the official figures streaming through Hong Kong alone, plus domestic production add to the total, and China is now the number one global gold producer.

As reported by Steve St. Angelo China has, during Q1, 2017, imported a record 57.4 metric tons of gold to the mainland, from Australia.

Notice the Australian/U.S. multi-year pattern of gold mine exports vs. production

In Addition: A parallel determinant is China’s effort to lessen its holdings of U.S. dollar reserves, by signing infrastructure agreements (denominated in yuan) with countries participating in its massive, long-term New Silk Road project. It’s been reported that China has even approached Saudi Arabia about yuan-based oil sales – a direct threat to the decades-long monopoly of the U.S. petrodollar.

And then there’s this:

The Perth Mint sold $11 billion worth of bullion to China last year alone, and demand continues to climb. Demand is so strong that Perth Mint brings in gold from mines in other countries like Papua New Guinea and New Zealand, and jewelry from South-East Asia that is refined down to the Mint’s signature 99.99 percent gold bullion. (ABC News)

and:

Steve St. Angelo reports that so far in 2017, scrap gold recovery is down sharply, even though the price of gold has risen – an unusual historic occurrence.

His projection for the year? “…as the price of gold has increased in 2017, global gold scrap supply will fall by almost a third, or 32% versus 2010… this major gold market indicator trend shift suggests that individuals are now holding onto their gold rather than sell it for a higher FIAT MONETARY PRICE.”

MD: So far you’ve said nothing of import. You might just have been describing the Hunt’s attempt to corner the silver market of yore.

A Surprising Shock-Rise?

 

Precious metals prices have been in a cyclical decline since mid-2011 – not unlike the last secular bull market in the 1970’s – before gold’s eight-fold rise less than two years later.

It’s understandable that you might meet this latest suggestion of an unexpected, massive rise in the price of gold and silver with skepticism. A rise that could take place so quickly that those who hesitate could not react before prices had climbed far above prevailing levels. Before the supply cupboard had been swept clean. But the truth is – it’s not a pipe dream, not blowing smoke, not wishful thinking. This is not just possible, but increasingly probable.

Everything in life involves playing the odds. If something is “unlikely” but possible, and if that something taking place had the potential of being a “game-changer,” would you not seek to prepare for it in some measure?

MD: Professional gamblers remove the odds from the equation. They totally control them … they don’t “play” them.

A vertical up-move in gold would place you in a tidy profit position, even if you held a relatively small amount (e.g. the oft-touted 5% of your investable assets). So, it’s not necessary to mortgage the house or go into debt in order to “participate.”

MD: This nonsense would make better hyperbole if you were discussing bitcoin. The deflation of bitcoin is a few orders of magnitude greater than gold. And with deflation like that, the utility as money to traders is the same … zero. But to gamblers (and so-called investors) it is a big deal.

I believe it’s almost “a given” that precious metals will resume their secular bull run, which could continue for the next three to five years. If you agree, does it not make sense to begin (or continue) a conservative metals’ acquisition plan? With little worry as to the price where you began?

MD: Well, you are a gold salesman. Peddle your wares. Tattoo artists have convinced lots of people that all those marks on their bodies will bring recognition to them. In the end, it will … negative recognition.

It’s not that difficult. Either buy metals when you have some surplus investible funds, and/or do so on a regular, dollar-cost-average basis. If the “China card” never gets played, you’ll still do well as metals’ prices advance over the coming years. You’ll have been purchasing “paid-up insurance” for the rest of your holdings, hedging more as time goes on.

MD: Buy raw land in a low tax jurisdiction. At least you can camp out there once in a while for recreation.

And one more thing. Don’t think of it as “spending money” on buying gold and silver. You’re simply exchanging continually-depreciating “paper promises” – the enduring term coined by David Morgan at TheMorganReport.com – for “honest money” which has stood the test for millennia and will likely continue for as far as the eye can see.

MD: That’s not too convincing. The gold and silver I bought four years ago does not exchange today for anywhere near what the dollars did that I traded for it. But in the long run you are correct. That 4% inflation leak does take its toll. We went through a period of gold escalation before in the 80’s as I recall. Then it fell like a rock and took 15 years to get back to where it was at its peak. Even with gold, timing is everything. 15 years is a real long time to a 30 year old … and to an 80 year old.

Remember, if you don’t hold it in your hand, you can’t be sure you really own it. John Hathaway, Tocqueville Asset Management covers this precisely, saying,

When the market reverses, the diminished physical anchor to paper claims, concerns over title and encumbrances on central bank bullion, and worries over the drift of public policy will drive liquid capital into gold. However, this time around, it seems to us that the major recipient of flows will be the physical metal itself. Holders of paper claims to gold will receive polite and apologetic letters from intermediaries offering to settle in cash at prices well below the physical market. To those who wish to hold their wealth exclusively in paper assets, implicitly trusting the policy elites to resurrect normally functioning capital markets and economic conditions, we say good luck. For those who harbor doubts on such an outcome, we say get physical.

MD: So that gold I have in GoldMoney.com’s vaults is not safe? I know to get one of their goldgrams from wherever it was and into my hands cost 10% of the value. I had to even pay import duties on it. Even if I had all that gold in hand, it would be sitting on my raw land in the low tax jurisdiction where I live … and frankly I would rather have a little more land and no gold … thank you very much.

David Smith is Senior Analyst for TheMorganReport.com and a regular contributor to MoneyMetals.com. For the past 15 years, he has investigated precious metals’ mines and exploration sites in Argentina, Chile, Mexico, Bolivia, China, Canada, and the U.S. He shares his resource sector findings with readers, the media, and North American investment conference attendees.

 

Thanks to David Smith, Originally Published on Money Metals Exchange