May 23, 2011
Following Friday’s news that China has now surpassed India as the world’s largest buyer of gold, it is becoming increasingly obvious that the country is trying to capitalize on the popular interest in the precious metal by transferring the trading infrastructure away from US to domestic capital markets. First, it recently launched a 1 kilo gold futures contract on the HK Merc in an obvious attempt to undermine the Comex monopoly in the space, and next it seems that China has the GLD plain in its sights, as it plans to start exchange-traded funds, tapping rising demand in China, the world’s biggest investment market for the precious metal. Often blamed for the recent volatility in the price of gold, precious metal ETFs have been primarily an instrument available to those with access to the US market. That appears to be ending, and with an entire nation suffering from gold fever (as inflation continues to be goalseeked by the China politburo above expectations in what appears to be a programmed attempt by the Chinese central planners to push its population into gold hoarding) and about to be offered a simple way of investing in (paper) gold, it is likely that the price of gold (and soon thereafter all other commodities) will see unprecedented spikes in price in either direction as millions more are given direct exposure to trading the non-dilutable currency equivalent.
“There are some complexities, as the central bank is in charge of gold management, while we still need to go through the procedures for launching new exchange products,” Wang Zhe, chairman of the bourse, said at a Shanghai forum. There is no timetable and the exchange is working with regulators on the plan, Wang said. China is the world’s largest gold producer and second-largest in overall consumption.
China doesn’t have gold ETFs and investors usually choose to buy physical gold, or invest through contracts traded on the Shanghai Gold Exchange, the Shanghai Futures Exchange or through banks. Lion Fund Management Co. in January said it raised more than 3.2 billion yuan ($483 million) for China’s first gold fund to be invested in overseas exchange-traded products.
Investment demand in China jumped 123 percent to 90.9 metric tons in the first three months. Total consumption including jewelry gained 47 percent from a year ago to 233.8 tons, the council said. That still lags behind India’s 291.8 tons. China demand may double before 2020, the council said.
Global investment increased 26 percent to 310.5 tons in the quarter. While bar and coin purchases climbed 52 percent to 366.4 tons, holdings in exchange-traded products backed by the metal declined. ETP assets dropped 69.9 tons from December through March, according to data compiled by Bloomberg, after reaching a record 2,114.6 tons.
Of course this merely opens up the path to currency “optionality” – after all it is not Guangdong or some other Chinese province, but Utah which just voted to make gold and silver legal tender: a previously preposterous (and very much illegal) idea. AP reports:
Utah legislators want to see the dollar regain its former glory, back to the days when one could literally bank on it being “as good as gold.”
To make that point, they’ve turned it around, and made gold as good as cash. Utah became the first state in the country this month to legalize gold and silver coins as currency. The law also will exempt the sale of the coins from state capital gains taxes.
Craig Franco hopes to cash in on it with his Utah Gold and Silver Depository, and he thinks others will soon follow.
The idea is simple: Store your gold and silver coins in a vault, and Franco issues a debit-like card to make purchases backed by your holdings.
He plans to open for business June 1, likely the first of its kind in the country.
“Because we’re dealing with something so forward thinking, I expect a wait-and-see attitude,” Franco said. “Once the depository is executed and transactions can occur, then I think people will move into the marketplace.”
The idea was spawned by Republican state Rep. Brad Galvez, who sponsored the bill largely to serve as a protest against Federal Reserve monetary policy. Galvez says Americans are losing faith in the dollar. If you’re mad about government debt, ditch the cash. Spend your gold and silver, he says.
His idea isn’t to return to the gold standard, when the dollar was backed by gold instead of government goodwill. Instead, he just wanted to create options for consumers.
“We’re too far down the road to go back to the gold standard,” Galvez said. “This will move us toward an alternative currency.”
Utah is first but certainly not last:
Earlier this month, Minnesota took a step closer to joining Utah in making gold and silver legal tender. A Republican lawmaker there introduced a bill that sets up a special committee to explore the option. North Carolina, Idaho and at least nine other states also have similar bills drafted.
At the moment, Franco’s idea would generally be the only practical use of the law in Utah, given the legislation doesn’t require merchants to accept the coins, either at face value – $50 for a 1-ounce gold coin – or market value, currently almost $1,500 per ounce. And no one expects people will be walking around town with pockets full of gold and silver.
Matt Zeman, market strategist for Kingsview Financial in Chicago, expects more people will start investing in gold as America’s growing debt and bankruptcies in other countries continue to decrease the value of government-backed money.
“You’ve seen gold replacing these currencies as safety instruments,” Zeman said. “If I don’t feel good about the dollar or other currencies, I’m putting my money in precious metals.”
Some supporters, including the law’s sponsor, seek to push Congress toward removing the tax burdens that discourage use of the coins, such as a federal capital gains tax.
“Making gold and silver coins legal tender sends a strong signal to Congress and the Federal Reserve that their monetary policy is failing,” said Ralph Danker, project director for economics at the Washington, D.C.-based American Principles in Action, which helped shape Utah’s law. “The dollar should be backed by gold and silver, so we have hard money.”
So, uh, does that mean that NORFED’s Bernard von NotHaus can now change his facebook status from “incarcerated terrorist” to “visionary revolutionary”? And one can be quite confident that as soon as China (inconjunction with Russia and other countries, not to mention Zimbabwe) will soon proceed to allow the same “option” for their own consumers, as increasingly more countries realize that the $6 trillion in dollar-denominated assets continue to place the world at the exclusive mercy of the Fed, as any global “risk flaring” episode would require the activation of the Fed’s FX swap lines designed to meet ‘short-term’ dollar deficiency needs… which just may not be activated for those which Hillary Clinton deems to be “terrorist” or “dictatorial” regimes at any given moment.
This article was posted: Monday, May 23, 2011 at 3:33 am