Zero Hedge did a great article over the weekend regarding China and the “vicious circle” that could be created with commodity price weakness. It used to be copper was used as “collateral” for carry, now it is iron ore. The “game” has been one of re re re hypothecation where say iron ore is deposited and letters of credit are issued off of the deposit and the “re” part is because in many instances several letters of credit are issued for the same ore.
This is a problem, a big one! Many financial writers speak to the levered status of the U.S. and Europe but miss the house of cards that is China. I believe that we will see before the year is up, Chinese defaults that actually end up as defaults. I say this because there have already been in 2 default situations (2 separate coal companies) where a “bailout” saved the day. Zero Hedge in the above article speculates that the PBOC may step up and do more “QE” so to speak of their own to prevent defaults. I say “maybe.”
I have written before that my opinion on China is different from what is common. I believe that China has “played” the game in order to build out their infrastructure. Infrastructure as in roads, bridges, plants, equipment and even cities where only ghosts currently inhabit. They have stockpiled more raw material than they need in many areas and this is viewed as a potential risk to a cascading downward spiral for commodities and their prices. This may be but China has also made deals all over the world to secure even more raw materials in the future…that will be paid for in dollars. I believe that China did not “allow” this credit bubble to expand to the current extremely dangerous levels by accident. I think that they knew full well where this would go and how it will end.
Think about what they’ve done. They have allowed the U.S. (the West in general) to go into too much debt. In fact, they have facilitated it. While they were “helping” us, they have positioned themselves for the next generations. I believe that they fully understand that the credit markets will go “boom” (they may even be the ones to pull the trigger?)…but, what remains after a financial collapse? What remains are stockpiles of raw materials that will be “used” in the future. The roads, plants, equipment and empty cities will all eventually be used.
Another “clue” for me about China is the fact that they have been hoarding gold. I would say that it is safe to say that they now have more gold than any other country. They are also now producing more gold than any other country on the planet! Do they view gold as a “commodity?” Have they stockpiled gold to “use” in the future? No and no. I think that gold is a big part of their “national strategy” so to speak. They fully understand that gold IS money and will be the last man standing as the global credit bubble bursts. Think about it, if the global markets were to just seize up one day and everything just stopped as in a “snapshot” photo where all the participants only “have what they have”…what would you as a nation want? You would “want” what they have newly built and stockpiled!
You have heard the above opinion before as I written about it several times but wanted to use that as a segue to a conversation I had last Thursday with Harvey Organ. Harvey has a theory which I agree with and had thought about this time last year. China is a “silver” country. They used silver for many years (between fiat blow up episodes) and had accumulated some 300 million ounces at the time of Mao back in 1949. The Yuan was originally a silver coin which was named after a Chinese general and is synonymous with the Renmimbi. The U.S. which no longer minted any silver in its coins since 1965 had a stockpile of possibly 2 billion ounces after the dismantling of the Manhattan project, by approximately 2003 all of that silver was gone. Harvey speculates that we approached the Chinese to “lease” their silver and is probably one of the reasons that they received “favored nation status” for trade. The Chinese agreed but understood that the pressure on silver prices was from their stock being bled onto the market as supply…but, they also understood that they could purchase gold at suppressed prices.
Harvey believes that the “lease” arrangement took place in 2003 which is exactly 10 years prior to April 2013, if the leases were 10 years in length it would explain last April’s carpet bombing of prices. If you recall, the COMEX silver open interest stayed quite high in 2012 and into 2013 and only after April did it begin to shrink in earnest. I wrote several times in 2012 and early 2013 that I believed the high open interest were of Chinese origin, who could have sustained such large losses from $45 down to $25 on a levered basis? Then suddenly the open interest fried up. The open interest has again neared 150,000 contracts which are odd because gold’s open interest has not risen. Harvey believes that “something” has really gone wrong behind the scenes as China is openly being aggressive with Japan and S. Korea which are both U.S. allies and protectorates. This is at a time where they also sold $48 billion worth of treasuries in a month. He and I both believe that “proxies” for China are where the resurgent open interest in silver is coming from…because they know. Our speculation is that China knows that their silver is gone…and will claim as much as they can from the COMEX inventories…however in the meantime they have been scooping up as much gold as they could and in far larger “dollar quantities” than the silver that they originally leased.
I have always said that the Chinese are a very smart people, if they were approached to lease their silver and then immediately following, silver became “plentiful” on the market place, then they knew where it was coming from. They used “this loss” as a way to accumulate gold by “going along with the game.” Silver and gold have acted very differently, not so much in price but in volume and especially in open interest. If we are correct about the use of “proxies,” the end of the game is whenever China chooses it to be. Far less than $5 billion could blow the lid off of COMEX silver. $5 billion is far less than chump change to China.
So they get some of their silver back in this manner but not all of it, who cares? I say “who cares?” because in the meantime they have built out infrastructure and probably accumulated more gold than the U.S “supposedly has.” Were China to “pull the plug” on the global paper Ponzi scheme and then immediately revalue gold multiples higher…they win the game. They will have won the game for generations to come! Speculation on our part? Of course it is but I bet that it is not very far from the reality.
Exactamundo Bill. The western media loves to try to placate the masses on the financial front with statements describing how deep China’s troubles are. They fail to mention, as you did so eloquently, that they are using their debt on real solid 3 dimensional objects not frickin paper garbage like we are.
And, they have one hell of an insurance policy to protect themselves “post economic fall out”..& most readers here know what that is.
Boy, this is going to end ugly…..
SG
yes, ugly.
Not for the Bankster ” Tribe ! “
Very interesting article, Bill.
Jim Sinclair, in your article last week, said that silver will lead in the current rally but we will have to eventually convert our silver to gold some time in the future. This future conversion has been on my mind. Does it mean that China will only value gold as money when the new global reset comes? If China has more gold than silver, then it would make sense for China to play its strong hand and demand gold be used as a global money asset and not silver.
However, world and Chinese history tells us that silver is money. It wouldn’t surprise me that silver will have a role in global monetary affairs again. Any thoughts on silver’s role after the financial reset?
silver will get to a far lower ratio, Sinclair believe a “decision” will be needed to be made to adjust part or all back into gold with an upcoming monetary event. I believe that the Chinese understand the monetary nature of silver…thus a move “back into gold” will not be necessary unless it is your choice.
This makes more sense to me than anything I’ve heard so far. Great article.
thanks
An empty city of skyscrapers, like an empty suburb of McMansions, is a deteriorating asset. Neither was a wise investment for the lender or the borrower. The acquisition of precious metals is wise. The acquisition of manufacturing is wise. The acquisition of technology is wise. The new rail, road and water and waste treatment infrastructure is wise. Building deteriorating empty cities was not. Still, a large number of wise strategic choices for China. The U.S., meanwhile, invested tens of trillions in banks that remain insolvent and tens of trillions in shock and awe in Iraq and Afghanistan.
…now that all depends on when their “move in date” is scheduled for doesn’t it?
Thank you for the article. I noticed chronological mismatch. China was granted permanent MFN in Dec 27 2001.
And what made you and Harvey believe that Cartel spent all 2 bln ounces right before 2003 ?
the US announced in 2003 that they held no more silver as it was being depleted over the years. 1999 was the beginning of “favored nation status”, 2001 was permanent status. Can you imagine a “quid pro quo” maybe? We are just trying to connect the dots as we were not invited to any of the meetings, you will notice that I said “we think” or “our theory” right?
Thank you for reply. Yes , I noticed it was a theory. On milesflanklin I read only your blog . I relay some of your ideas and thoughts to audience in KZ and RU through my blog, called “Planet Silver” if translated from russian.
my pleasure.
Your conclusion is correct, but Zero Hedge’s hypothesis is totally wrong.
Unlike the US Government, China finances all of its projects through its banks. Money from Chinese banks is loaned to buy gold. After the physical gold has been delivered to China, those short term loans are paid.
This is a win-win approach, since it helps the banks, and removes the government from the problems of management responsibilities. It also reduces the possibility of government corruption.
Once the physical gold has been delivered, the PBOC/Treasury can print new gold-backed Yuan, which is required for the internationalizing of the Yuan. Domestically, the Yuan has been gold-backed for at least 4 years.
As for the so-called ghost cities, most of the housing and commercial sites have been sold to Chinese investors that desire to purchase physical assets and not paper assets. The Chinese government is not influenced by the Chinese stock market. To them, the stock market is irrelevant.
China is mainly a Cash and Carry society. In other words, China is a pure capitalistic economy.
I disagree with a “cash and carry society”, their real estate market is highly levered.
My comment: “cash and carry society” was a reference of the general Chinese population, and not the handful of Real estate Developers, which are major contributors to the “shadow banking” trusts. My guess is that some of the new reforms will target their practices.
thank you for the comments Victor, the shadow banking sector will be sacrificed…it took place in my opinion to facilitate “playing the game”.
The Chinese have always played the long game. It is just possible, that this plan, is in retribution for getting stiffed when the Yanks (and some fleeing Chinese Emperor hangers-on left with the booty back between 1927 and 1938) who took 50million ounces of silver, and gave them pieces of paper (FRNs – BEARER BONDS – to the tune of almost $1Trillion including interest at current prices.) and re-valued it almost immediately.
Of course, the Gold and silver according to reports I read has long gone – perhaps to the very vaults they were purloined from, but now the retribution can begin when the Chinese announce in April their Gold Holdings – which I expect to be in excess of 7,000 tonnes.
http://fofoa.blogspot.com gives a good bit of background.
The full story of the takeover of the world economy by the Bankers is available in “The Coming Battle” for FREE – link @ http://moneymatterstoo.wordpress.com – At 633 pages for the free edition it is a good read, but makes yer blood boil. (Well it did mine)
W.
that is why the Chinese have no problem signing leases for 99 years…as long as they end up with ownership ie. (Panama Canal, Hong Kong)
Bill
It’s not a bad plan to get someone else to do the development, then swoop in when the job’s done.
Incidentally, I showed that book (The Coming Battle) to Ted Butler, who commented that it was “impressive”.
It’s in the process of being updated to reflect more recent events… if you’d like a copy to read/review, just drop me a line – you have my e-mail address on file.
W.