China: Dubai Crisis Good for Buying Gold, Oil

call it "Beijing Put"...

Chinese are counting on the Dubai crisis to linger for a while so that they can buy gold cheaper. Will they get their wish?

Dubai crisis gives China chance to buy oil, gold: report (11/30/09 Reuters via Washington Post)

"BEIJING (Reuters) - Dubai's debt crisis could be China's opportunity to snap up gold and oil assets, a senior Chinese official said in remarks published on Monday.

"No Chinese banks have yet reported exposure to debt from Dubai World, a flagship firm that last week said it was seeking to delay debt payments by six months. Some Chinese real estate and construction firms have limited exposure to projects in the emirate, state television reported this weekend.

"China's $2.27 trillion in foreign exchange reserves are mostly parked in U.S. treasuries, despite calls from some in China to invest the reserves in oil and other natural resources that the fast-growing Chinese economy will need in future.

"While the impact of the Dubai crisis on the global economy and on China was not known yet, it would last a while at the very least, Ji Xiaonan, who chairs the supervisory board for big state-owned companies under the State Council's state assets commission, told the Economic Information Daily.

""That could give China a buying opportunity to put some forex reserves into gold or oil reserves," Ji was quoted as saying by the paper, which is widely read by Chinese officials.

"Another paper, the China Youth Daily, quoted Ji as saying that a team of experts from Beijing and Shanghai had set up a task force last year to look at the issue of gold reserves.

""We suggested that China's gold reserves should reach 6,000 tons in the next 3-5 years and perhaps 10,000 tons in 8-10 years," the paper quoted him as saying."

Currently, China's gold reserve is 1,054 tons, making it the 6th largest gold reserve holder in the world just above Switzerland. The U.S. gold reserve, in comparison, is 8,133 tons, the world largest. The second largest gold reserve holder is Germany, with 3,408 tons.

"Beijing put" is indeed on gold price.

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Gold Jumps to All-Time High (Nominal) on IMF Gold Sale News

Gold surges to new record high (11/3/09 AFP via Breitbart)

"Gold surged to a new record high price of 1,085.07 dollars an ounce Tuesday, a day after an announcement of a massive sale of gold by the International Monetary Fund to India.

"Prices in London hit 1,085.07 dollars per troy ounce and New York prices reached 1,084.70 dollars, breaking records set last month.

"The latest surge came a day after the International Monetary Fund announced it sold 200 tonnes of gold to India's central bank over a two-week period last month for a total of 6.7 billion dollars to bolster its finances.

"The IMF said the transaction, which was in the process of being settled, involved daily sales that were phased over a two-week period during October 19-30. "

It was off-the-market transaction. India's gold reserve is now 557.7 tonnes, or 6% of the country's foreign reserve.

It was widely speculated that it would be China who would grab IMF gold. China (1054 tonnes, 0.9% of foreign reserve) may still go for the remaining half. Other contenders include Russia (524 tonnes, 4% of foreign reserve), any of the Gulf states, and South East Asian countries.

During this sales operation, gold price had a minor correction. It went from $1065 on October 19 to $1026 on October 28, and ended October 30 at $1045. So, the much-dreaded correction was mere $39, or 3.7% at most.

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How Much Dollar Is Worth If Backed 100% By Gold

You can laugh it off, you can scoff at it, or you can take a mental note of it.

"A Tremendous Secret" (John Rubino, 7/15/09 Goldseek.com)

The article talks about that rumor about bank holidays in fall in which all the major currencies in the world "reset" (get devalued) against either gold or basket of currencies or IMF's SDR.

So, I decided to do some simple calculations to figure out the magnitude of devaluation if it were to occur vis a vis gold, and if the new devalued currency was to be backed 100% by gold.

Step 1. Gold reserve of the United States

I assume that the gold vault at Fort Knox contains what the government says it contains. According to Gold Council, the U.S. has 8,133.5 metric tonnes of gold as of March 2009 (from Wikipedia.org).

• 8,133.5 tonnes = 286.9 million ounces

Physical gold is trading at $939 an ounce today. So the U.S. gold reserve is currently worth:

• 286.9 million oz x $939 per oz = $269.4 billion

Step 2. Total amount of "money" in the U.S.

Here I have a problem. Which "money"?

• M0: The total of all physical currency, plus accounts at the central bank that can be exchanged for physical currency.
• M1: The total of all physical currency part of bank reserves + the amount in demand accounts ("checking" or "current" accounts).
• M2: M1 + most savings accounts, money market accounts, retail money market mutual funds,and small denomination time deposits (certificates of deposit of under $100,000).
• M3: M2 + all other CDs (large time deposits, institutional money market mutual fund balances), deposits of eurodollars and repurchase agreements.
  (from Wikipedia.org)

The Federal Reserve stopped reporting M3 in 2006, but there are private sites that claim to reconstitute M3. Here's one of them.

Not sure of which money to use, I decided to use all of them. I took the data from St. Louis Fed's FRED (one of my fave sites) for M0, M1, and M2. I eyeballed M3 from the chart at Shadow Government Statistics, and also from St. Louis Fed's discontinued M3 series chart.

• M0: $912 billion (currency in circulation)
• M1: $1,652.9 billion
• M2: $8,349.2 billion
• M3: between $12,000 billion and $14,000 billion. (I'll use $13,000 billion
  for my calculation)

Step 3. Divide the gold reserve amount by "money" in the U.S.

So that we can figure out how much $1 would be worth in gold-terms if the U.S. dollar was to be backed by gold 100%. And here's the result:

• Gold/M0: 0.295
• Gold/M1: 0.163
• Gold/M2: 0.032
• Gold/M3: 0.021

Or the flip side - how much "1 gold dollar" would be worth in current dollars:

• M0/Gold: 3.385
• M1/Gold: 6.135
• M2/Gold: 30.99
• M3/Gold: 48.255

That's why some fanatic gold bugs scream about gold hitting tens of thousands of dollars per ounce, and not so fanatic gold bugs still predict gold at $3,000 and above.

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China Wants To Buy IMF Bonds If Issued

First it was Japan, then Russia, and now China. They all want to loan money to IMF, International Monetary Fund. Japan already did back in February.

China explores buying $50bn in IMF bonds (6/5/09 Financial Times):

"China is “actively considering” buying up to $50bn of International Monetary Fund bonds, the country’s State Administration of Foreign Exchange has said."

"Friday’s statement by China said any investment would be made according to its usual criteria of “safety and reasonable returns”, but made no mention of Beijing’s wish for more power in IMF decision-making, in return for financial support.

"Safe, which controls almost $2,000bn of China’s foreign exchange reserves, added it was ready to help the IMF explore more ways to raise finance."

Russia ready to invest $10 bln in IMF bonds-Kudrin (5/27/09 Reuters, via Guardian UK):

"Russia is ready to invest up to $10 billion in bonds which may be issued by the International Monetary Fund (IMF), Finance Minister Alexei Kudrin said on Wednesday.

"The IMF has said it is considering issuing bonds on top of the funds it is receiving from some members, as well as through a Special Drawing Rights issue. The bond issue would be a first for the Washington-based global institution."

IMF Signs $100 Billion Borrowing Agreement With Japan (2/13/09 IMF announcement):

"Japan has provided the IMF with an additional $100 billion to bolster the Fund's lendable resources during the current global economic and financial crisis.

"Managing Director Dominique Strauss-Kahn and Shoichi Nakagawa, Minister of Finance of Japan, signed the terms of Japan's $100 billion commitment on February 13 under a borrowing agreement designed to temporarily supplement the Fund's financial resources.

"The initial period of the commitment by Japan is for one year, and may be extended by the IMF for up to a total of five years if warranted by the Fund's liquidity situation and its actual and prospective borrowing needs. Each drawing will carry interest at the interest rate on the IMF's Special Drawing Rights, which is currently 0.62 percent."

Japan's loan is almost as large as one-third of total IMF quotas, which stood at US$325 billion as of March 31, 2009. (Data: IMF)

All these three countries are said to want to have more say in IMF, as well as more influence in international economic and financial matters which have been dominated by the US.

The following is the quotas of China, Russia, and select countries measured in IMF's SDR. The country's quota roughly translates to voting power (influence). For China and Russia to exert more power at IMF, they indeed need something extra. As of June 5, 2009, US$1 is SDR 0.645799. (Data: IMF)

• China: 8,090 million SDR (3.72% of total quotas)
• Russia: 5,945 million SDR (2.74%)
• Japan: 13,312 million SDR (6.13%)
• Saudi Arabia: 6,985 million SDR (3.21%)
• France: 10738 millin SDR (4.94%)
• UK: 10,738 million SDR (4.94%)
• Germany: 13,008 million SDR (5.99%)
• US: 37,149 million SDR (17.09%)

I personally think the move by China and Russia, even of Japan, is their effort to ditch at least some of the US dollar denominated foreign reserves they are stuck with: US Treasuries and agency bonds. All three countries have LOW gold reserves (see this wiki page on official gold reserve), their currencies just as "fiat" as the US dollar. Euro has some gold backings, toward which Russia seems to be shifting more. On the other hand, IMF HAS GOLD. 3,217 metric tons of it.

When IMF actually issue its notes or bonds, what will be the collateral? Its gold (if it is indeed IMF who owns it, not the members)? US Treasury Department issues Treasury securities with the government's words that they will be repaid; in other words, they are mortgaging the future tax revenues from the productive citizens and businesses of the US. IMF does not have such productive citizens. So..?

I suppose IMF can issue debt based on the potential future cash flow from the countries who will borrow from IMF. (Wait, isn't that concept what got us into trouble - Mortgage-Backed Securities?? Hmmm.. I don't see this ending well.)

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Is China going to buy IMF gold?

'China ready to buy IMF gold with a telephone call' (Business Intelligence Middle East)

Officially Reported Gold Reserves (Wikipedia)

Check out the table in Wiki. Gold percentage of the total Chinese reserve is only 0.9%. Maybe Japanese (1.2%) or Russians (2.2%) want to convert their foreign currency reserve to gold..?

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