Jim’s Mailbox

Posted at 2:14 PM (CST) by & filed under Jim's Mailbox.

Kevin checks in regarding yuan gold pricing.
Bill

Yuan Gold (XAUCNY) is gold leading the way higher through 9000 RMB per ounce and through US Gold $1380 US its swing high equivalent. And the only way to prevent much higher US Gold prices from there, is for more pronounced weakness in Chinese Yuan against the dollar (CNYUSD). IMO, a weaker Chinese Yuan (CNYUSD) exchange rate is not desirable by the Fed, Treasury, ESF, the President’s Working Group on Financial Markets nor the PBOC/SAFE. And to be sure, a higher Yuan Gold (XAUCNY) price is the last thing the Fed, Treasury, ESF, the President’s Working Group on Financial Markets seek but is at the top of the bullet point list of the PBOC/SAFE white papers for meeting the CCP goals of prosperity.

Mathematically: Yuan Gold (XAUCNY) x Chinese Yuan (CNYUSD) = $US Gold Price

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Albeit a weaker Chinese Yuan (CNYUSD) may have been tolerated by the FED and Treasury when the U.S. and world economy was buzzing along nicely with PBOC/SAFE accumulating new U.S. Treasury offerings. However, a weaker Chinese Yuan (CNYUSD) is certainly not desired by U.S. now. Trade wars, embargoes, worldwide economic slowdown, and debt saturation still can’t create an environment that encourages PBOC/SAFE or other foreign CB’s to accumulate U.S. Treasuries. And for China itself, a lower Chinese Yuan (CNYUSD) may help Chinese exports but conversely also increases the FX debt burden of Chinese borrowers, albeit a small one, who borrow in dollars but whose revenue is denominated in Yuan. However, a higher or stable Chinese Yuan (CNYUSD) clearly increases the standard of living for its burgeoning middle class that represents the biggest meal ticket for the next 50 years for those same Chinese companies that are currently exporting to U.S. but have their eye squarely on their own domestic market’s near and long term growth.  Conclusion: Chinese Yuan (CNYUSD) stability at a minimum and strength are likely now that the world economic slowdown, ensuing financial collapse is on. And when the dust settles, it will be gold dust in China and paper ash in the U.S.

Correspondingly, a higher Yuan Gold (XAUCNY) price is also not desired by the Fed, Treasury, ESF, and the President’s Working Group on Financial Markets because that will drive worldwide gold prices higher, allow for a Chinese gold price discovery market based on physical gold not U.S. paper contracts levered 92:1, and create even more havoc for U.S. dollar’s reserve currency status and balance of trade account. But the Fed, Treasury, ESF, and the President’s Working Group on Financial Markets are helpless in preventing a significant rise in Yuan Gold (XAUCNY) either. They no longer have the means to do so because so much physical gold has moved East over the last 10 years and is now being accumulated in record amounts by central banks worldwide at a time when world production is set to decline with M&A in mining exploding. This is a perfect storm for higher gold prices worldwide. Conversely, higher Yuan Gold (XAUCNY) prices would greatly benefit China’s saving minded middle class households who have plowed some 17,000 MT or 530 million ounces of physical gold since restrictions were lifted in 2008. According to Credit Suisse Wealth Databook 2018 (pages 63 & 103)

https://www.credit-suisse.com/corporate/en/research/research-institute/global-wealth-report.html total Chinese Household Net Worth equals about $51.8T. Average Chinese wealth has enjoyed a 10% annual increase since 2008 while the median Chinese household has enjoyed a lesser yet respectable 7% annual increase. At the current Yuan Gold (XAUCNY) price of 8879 the value of 530 million ounce is about $700B US representing 1.4% of total Chinese Household Net Worth. Bearing in mind that not all of that non-monetary gold is in the hands of households, but it is clear that it is not in the hands of the PBOC/SAFE. So ask yourself two questions. Do you think that the PBOC/SAFE would encourage its private sector and households to accumulate so much gold if it was not meant to be a sound investment that increased in value? Do you think that the private sector in China has accumulated more gold than the PBOC/SAFE? IMO the answer is “no” to both questions.

But how much Chinese PBOC/SAFE monetary gold or how much value of that monetary gold is enough to create a new Chinese Style Bretton Woods agreement so to speak with a twist that involves true price discovery of physical Yuan Gold (XAUCNY) not just a U.S. dictated price that the 1944-45 agreement dictated. Paraphrasing James Dines’ in The Invisible Crash published in 1975, “Back then only the U.S. could change the price of gold, and all other nations were forced to upvalue or devalue in terms of dollars. And the world’s currencies were expressed in and closely held in dollars. The problem was that Bretton Woods required reserves to be composed of either gold or any currency convertible into gold. And that was the killer because it included the dollar that was run into the ground through debt creation while gold prices were fixed at an abnormally low price.” For a Chinese Style Bretton Woods system to work, true price discovery for Yuan Gold (XAUCNY) must exist and PBOC/SAFE need an ample amount of current gold reserves and future gold reserves to maintain the value of the YUAN. According Charles A. Coombs, former Senior Vice President of Federal Reserve Bank of New York responsible for U.S. Treasury and Federal Reserve operations in the gold and foreign exchange markets in his book The Arena of International Finance, to paraphrase, “At the end of the war and beginning of Bretton Woods system the U.S. gold stock amounted to $20B roughly 60% of total official central bank gold reserves and amounted to 4x the value of total dollar reserves of all foreign central banks and foreign dollar deposits.” Doing that today for the US would be impossible with only 8,133 MT or 261.5M ounces unless it were valued at 4x the $6.7T of allocated and unallocated US dollar exchange value held by foreign central banks. That would require the value of 8,133 MT of US gold to be worth $26.8T or $100,000/oz. But for the Chinese the picture is quite different.

“The majority of Chinese public debt is not officially owed by the central government. However, all of that debt is ultimately guaranteed by the national government of China and should rightfully be recorded in its entirety as the Chinese national debt. True debt to GDP ratio for China’s national debt up to 92.8%” https://commodity.com/debt-clock/china/ . That includes central government debt, municipal debt, shadow banking debt, local government debt, and all other hidden debt. GDP is about 83T Yuan or $12.2T and places total Chinese “public and public guaranteed” debt at about 76T Yuan or $11.2T. “Yet the majority of debt issued by Chinese government and organizations is in local currency. And the great bulk of that, in turn, is held by domestic institutions and individuals. China’s external debt is at 13 percent of GDP. And is very low by world standards. External debt refers to the total amount of public and private debt owed to non-resident individuals and entities. Foreigners own a tiny 3 percent of China’s debt. By comparison, Japan’s external debt is 74 percent of GDP. It’s 126 percent in Australia, 97 percent in the U.S., 38 percent in Brazil, and 24 percent in India (and the U.S. 30%+).” https://www.valuewalk.com/2017/05/chinese-external-dent/ China Gross External Debt owed by official sector is only about 11.3T Yuan $1.7T US. https://tradingeconomics.com/china/external-debt That includes throwing into that mix external debt not officially owed by the central government but guaranteed by same including debt owed in dollars or foreign currencies. https://www.barrons.com/articles/does-chinas-external-debt-pose-a-major-risk-1444726980

China Domestic Gold Production amounted to 426 MT or 13.7m oz in 2017 accounting for 13.03% of global gold production, making China the world’s largest gold producing nation for the 11th consecutive year and double that of the U.S. China’s Established in Ground Gold Resource Reserves were 13,195 MT in 2017 , for YoY growth of 8.45%

http://www.chinabankingnews.com/2018/10/22/china-first-world-annual-gold-production/

If PBOC/SAFE true current gold reserves were to amount to 60% of all central bank reserves like the US had in 1945 or even 70% like the US had as late as 1957, some 20,000 MT seems reasonable, and it also amounts to slightly more than the Chinese private sector’s 17,000 MT. If those 20,000 MT or 643 million ounces had a value of 4x external Yuan debt, it would need to be valued at $6.8T or US Gold $10,575. That means either a stable Chinese Yuan (CNYUSD) and an 7x increase in Yuan Gold (XAUCNY) or a combination thereof. Makes no difference to $US Gold because mathematically: Yuan Gold (XAUCNY) x Chinese Yuan (CNYUSD) = $US Gold Price.

And it makes no difference to Chinese Official or private sector as it is a win win for them too.

Kevin