Wednesday, July 22, 2015
The gold sector just took a big hit...
On Friday, the People's Bank of China published its gold reserve figure for the first time since 2009. The official announcement said the country has just 53.3 million ounces of gold. That's less than half of what analysts expected.
The news sent the gold price plummeting 16% from its January high. It's now at a five-year low.
But this may be exactly what China wants. So that begs the question: Is China lying about its gold reserves?
The short answer is: probably.
China is a closed society, so information is tough to get and official numbers aren't reliable. And there are several reasons why the number should be higher.
For example, when China reported its gold reserves back in 2009, it said it held about 33.9 million ounces. In its recent announcement, it said it had about 53.3 million ounces.
That means China's reserves have grown at about 3.2 million ounces per year. At that rate, it would take China until 2079 to reach the same level of gold reserves as the U.S.
This is highly unrealistic. I don't think China wants it to take that long. For starters, the president of the China Gold Association, Song Xin, said in July 2014 that China should accumulate 273 million ounces of gold to help support the renminbi as an international currency. This is more than the U.S. claims to have now.
China is also gold crazy. In the past decade, it has ramped up domestic gold production. The country has been the world's largest gold producer for the past eight years. It should be the largest this year, too.
At the end of June, the chairman and secretary general of the China Gold Association, Zhang Bingnan, said the Chinese produced more than 90 million ounces of gold domestically from 2007 to April 2015.
And that doesn't include China's gold imports. The chairman of the Shanghai Gold Exchange, Xu Luode, said China imported nearly 50 million ounces of gold in 2013.
Overall, Bloomberg Intelligence, a market analytics group, believes China has around 112.8 million ounces of gold.
Remember, the official announcement said the country has 53.3 million ounces. So nearly 60 million ounces of gold are missing...
That's why I believe China is "sandbagging" the market. In short, by reporting low gold reserves, China has created a lower gold price. This allows the country to import gold more cheaply.
We've seen this type of move before...
The U.S. Treasury has criticized China for years for "significantly" undervaluing its currency. You see, keeping the renminbi weaker makes China's exports cheaper to the rest of the world.
We can't know for certain how much gold the Chinese hold. But regardless of whether or not China is lying, I still believe gold prices are likely headed higher. As I've shown you in these pages before, sentiment toward the metal is terrible – which points toward a bottom.
And world banks are printing massive amounts of money right now. Europe, Japan, and China have all followed the U.S.'s lead in adding money to their systems to boost their economies. By doing this, they're devaluing their currencies. For example, the euro has fallen 20% versus the dollar in the past year.
With the world's governments continuing to print more and more paper money, it will take more and more of it to buy gold.
Unlike paper currency, you can't just print more gold. There's a finite amount of it in the world. According to market research firm Thomson Reuters' 2015 GFMS Gold Survey, just 5.9 billion ounces of gold have been produced to date.
That's why I'm using the recent decline in gold prices as an opportunity to build up my personal gold holdings. You might want to do the same.
Find more of Matt's recent research here:
"Zombie Wells" Are Creating a Big Problem for These Oil Stocks
"All eyes are on the oil price and drilling rig count right now... But there's another number investors should be focused on... And it points to more pain ahead for some oil and gas companies..."
This Metal Is Nearing Another "Boom" Phase
"There's one lesson every resource investor eventually learns... Natural resources go through huge cycles of boom and bust. That's what we've seen over the past few years with nickel..."
Credit-card companies MasterCard and Visa are up 25%-plus over the past year.
It's a bull market in video games... Electronic Arts and Activision Blizzard jump to new all-time highs.
Large-cap timber producer Weyerhaeuser sinks to a new 52-week low.
Another bad sign for uranium... sector fund URA falls to an all-time low.