Wednesday, July 11, 2018

China appears to have seized control over the price of gold from the United States

It is starting to appear that the Exchange for Paper (EFP) scheme that is going on between the Comex and LBMA is having interesting consequences for U.S. control over the gold price.  And by this we need to look at an interesting dichotomy occurring between gold and two different currencies.

Ever since the middle of June when the gold price fell below $1300 per ounce, the dollar has gained in strength as rhetoric over a trade war with China began to heat up.  But rather than move in accordance with history, and by this we mean that gold in the past would normally have prospered under chaotic conditions, it instead began to follow a different track, and emerge almost in lockstep with the Chinese Yuan.

June saw China accelerate their currency devaluation to alleviate the effects that the oncoming trade war was having with their exports.  And what is very interesting is that as this devaluation began to take place, the price of gold began to move in that same direction with the Chinese currency.

Chinese Yuan one month chart:


Gold one month chart:


As you can see, the price movements are nearly identical over the past month.  But according to work done by Craig Hemke over at TF Metals and Sprott Money, it may also have been going on for over a year now.
Now consider this. Since the PBOC began to actively devalue the yuan versus the dollar four weeks ago, the price of COMEX gold has tracked the yuan nearly tick-for tick. 
And so, here’s where it all gets quite interesting. What are the implications of China assuming control of the global gold price and the existing physical distribution centers in London and New York? Many have long speculated that the Chinese government and the PBOC have stockpiled thousands of metric tonnes of physical gold over the past two decades. It should come as no surprise that the world’s largest holder of physical gold would want some measure of control over its price. As David pointed out in his column, “he who owns the gold sets the rules”. But to what end would China be driving price? 
By linking the dollar price of gold directly to the yuan, the PBOC has eliminated for now a level of foreign exchange risk to their gold portfolio. Have they done this to enable themselves to continue acquiring physical gold from the west at a “set price” ahead of further yuan devaluations? Is the PBOC planning for a trade war or a liquidation of their massive U.S. treasury position? Or, instead, are they planning for something much more significant? – Silver Doctors
Since the Comex can no longer provide assurances for the contracts they sell by the fact they have to transfer them en masse over to London for resolution, and the LBMA itself doesn't have the gold in its vaults to accommodate what has already become more than the world's annual mine output here in just the first six months of 2018, it appears quite probable that China has now taken control over the pricing in the gold markets, and can at any time reverse the current trend for economic or geopolitical reasons.

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