How China Could Make Gold Prices Explode

“El Jefe,” the question from Kevin began, “in one of your dispatches, you say that China has 12,000 to 30,000 tons of gold instead of the reported 2,230 tons. My question is, if China came out and said they had 12-30k tons of gold, how would that affect the gold price?”

That, dear readers, is a helluva good question.

It’s not one I have ever been asked. 

And the answer, being equally as good as the question, deserves the space of a full dispatch—because it’s not a simple answer.

First, does China really have much as 30,000 tons of gold in reserve?

No one knows. But as I’ve pointed out here in Field Notes and elsewhere, it’s fairly easy to track the amount of gold flowing into and out of China by way of Hong Kong, the primary port for the gold trade. Hong Kong, being imbued with the British Empire’s love of anally retentive bureaucratic paper shuffling, tracks every staple and nail that comes and goes through the former British colony.

I read through all those documents at one point and it was blindingly clear that China imports a ton of gold (largely from Switzerland) and doesn’t export very much, meaning almost none.

Moreover, China is the world’s largest gold-mining country, and has been for 15 years or so. Very little of that gold leaves the country.

So one can rightly ask: How does China only have 2,200-ish tons of gold, given the vast amounts of gold it mines and imports?

The most logical answer is: The Chinese are lying. Shocking, I know.

Alas, I’m not the only one suggesting that China has been papering over the truth with lies designed to undersell the truth. Morningstar, MarketWatch, and others have all posted stories about China’s “secret gold buying”… that secret buying has likely pushed the country’s true gold holdings to multiples of what it has reported.

Other stories out of Australia (much closer to the Chinese economy than the US) suggest that Chinese companies and citizens collectively own more than 31,000 tons of gold, the largest gold hoard in the world and more than 4x what America owns privately.

Returning to Kevin’s question: What does any of that really mean if China were to officially announce, “Yo, citizens of the world—guess what? We’ve been punking you punks! We don’t really have just 2,200 tons of gold. We have 30,000 tons! And privately, our people and companies own more than 31,000! Ya bunch o’ suckers!!”

My immediate answer is this: In that moment, you will wish you had listened to El Jefe and bought gold at $1,000 and $2,000 and $3,000, etc. because gold prices would shoot the moon.

China making such an announcement would tell the world that the Chinese have built the world’s largest anti-dollar hedge fund, and that China could dump every single Treasury bond it owns, sell every single dollar held in every single Chinese bank… and China wouldn’t feel the sting that all the naysayers insist China would feel if it dumps the dollar and Treasuries.

Gold prices soaring across 30,000 tons of metal would far offset any loses in China’s holdings of US debt.

But there’s a much bigger, more calculated, benefit to China and to anyone savvy enough to hold gold today: Revaluation.

Back in 1933, when FDR confiscated gold and made private ownership illegal, he also revalued gold 69% higher. He did so to shore up the dollar, which was falling in value globally because of the economic stupidity of tariffs (the Smoot-Hawley version, in this case) and the ongoing impacts of the Great Depression on the US economy.

China could easily do the same. What’s to stop it?

The brain trust in Beijing could announce that, along with all this gold it’s been secreting away for years, it has also decided to revalue gold at the yuan equivalent of $10,000 per ounce.

And just like that, gold prices globally surge.

The purchasing power of fiat currencies would plunge.

In theory, that would benefit Uncle Sam too since he owns about 8,100 tons of gold. But again, that’s theoretical, since the Federal Reserve has not authorized a full and proper audit of America’s gold since the early 1950s… so who knows what the US really owns?

Still, gold revaluation, as I’ve noted in several past dispatches, is on the Trump agenda. So China revaluing its gold would certainly mean Trump could do the same, allowing him to borrow against the newly unlocked wealth (likely to build the Bitcoin Reserve Fund he talks about).

All of this fits into the Future of Wealth as I see it taking shape.

Fiat currencies, particularly in the West—and particularly the US dollar—are nearing their expiration date. They all have much too much debt. You can build an economy for a short time on borrowing, but at some point the borrowing becomes so large that:

• The interest payments on the debt collapse the economy…

• Or, the government is forced to radically devalue the currency to afford the debt…

• Or, government writes off the debt (a default that rips apart the US economy and American families)…

• Or, government concedes that fiat currency is just a construct and that neither the currency nor the debt have any real value beyond whatever Monopoly-money valuation government wants to assign to the paper.

Gold, however, has represented real wealth for millennia.

That hasn’t changed.

It won’t change.

Man is not so smart in the 21st century that he no longer has need for a “barbaric relic” because paper assets are magically more valuable.

China announcing a vastly larger stash of gold would underscore that point. It would be China blaring loudly to the world that fiat currencies backed by the full faith and credit of any government are worth exactly the weight of a spoken word… or exactly bupkis.

To prepare for this Future of Wealth requires that we all think more like the Chinese and secretly (or openly) accumulate more and more gold, as much as you’re comfortable holding (as I’ve noted in various places, more than 23% of my wealth in all my brokerage accounts is in gold; that doesn’t include all the physical gold I own in safe deposit boxes on two continents).

One day, we’re all going to find out exactly what a fiat dollar is really worth.