China buys gold that the IMF and others are selling... (update)

As said in previous posts, I question the intelligence of the US Federal Reserve's monetary policy. More generally, I think that theAnglo-Saxon economic and financial policy has been a complete failure. The latest 'aggressive move' includes the complete explosion of budgetary balances and the willingness to print money ad nauseam.

China has shown some unease with the US monetary and budgetary policy recently.Stefan Karlsson writeson his excellent blog that China has decided to buy more gold:

Recently, the price of gold has been under pressure because of a decision by the IMF to sell off much of its gold reserves. While I believe that most other factors support the bullish case for gold, I also recognize that the bullish scenario is threatened by decisions of the IMF and certain central banks to sell gold.

Now the price of gold increased somewhat on the news that the Chinese seem to have a different attitude towards gold th

an Western central bankers, as

. If China and other emerging economies start to buy a lot of gold, then this will cancel out much of the effect of the gold sales of other central banks, and so improve the odds of future gold price increases.

(hat tip: Koen) Naked Capitalismalso has a story on the Chinese gold buying. The message is clear. China is divesifying away from the dollar. If the Chinese are losing their faith in the US dollar as a reserve currency, this will have important consequences.

China revealed on Friday that it built up its gold reserves by three quarters since 2003, making it the world’s fifth largest holder of bullion.

The move comes as European central banks continue to sell their gold and the International Monetary Fund has discussed selling some of its bullion reserves.

“This is probably the most significant central bank announcement since the Central Bank of Russia announced at the LBMA gold conference in Johannesburg in 2005 that it wanted to hold 10 per cent of its foreign exchange reserves in gold,” said John Reade of UBS.

Ahead of this month’s G20 meeting in London, China said reliance on the dollar as the world’s reserve currency should be reduced by making greater use of special drawing rights, the synthetic currency run by the International Monetary Fund.

This led to speculation China was considering changing its policy which has seen the majority of its foreign exchange reserves channelled into the US government bond market and other dollar denominated assets.

This has raised the question of whether China plans to increase the proportion of its foreign exchange reserves that it holds in gold and how much it could buy

Naked capitalism gives a nice overview of the chain of events since the start of the crisis from a Chinese perspective:

• T

  he U.S. sub-prime mortgage market implodes, causing Fannie and Freddie to go bust.The Chinese start dumping GSE paper. (

  27 Aug 2008 post

  )

• Meanwhile, Tim Geithner was putting his foot in his mouth and telling everyone China was 'manipulating' its currency. Vice President Biden had to correct him, but the damage was done and the Chinese went on a rampage, savaging the U.S. at Davos (Geithner:

  28 Jan 2009 post

  ; World Economic Forum:

  29 Jan 2009 post

  )

• Then, in March,the Chinese premier started making the same noises about Treasuriesthat he had about GSEs earlier (

  13 Mar 2009 post

  ). Was he bluffing?

  Marshall Auerback said so

  at the time. I am a bit more concerned.

• Showing increasing signs that they were not bluffing, the Chinese startedavoiding using dollars in transactions in deals with countries like Argentina(

  31 Mar 2009 post

  )

• Then, before the G-20 summit this past month, the Chinese start floating the idea that it wants to move to a SDR (special drawing right)-centric world,loosening the U.S. grip on being the world's reserve currency. Of course, there was the chatter about the Chinese pegging their currency to copper instead of the U.S. dollar. Obviously, they had worked this out with the Russians ahead of time. (

  1 Apr 2009 post

  )

• After the summit, the whole lets-not-settle-trade-in-dollars meme continued asthe Chinese struck yet more deals to do so(

  9 Apr 2009 post

  )

So, here we are, three weeks out from the G-20 and now we learn the Chinese have been buying gold. In my mind, there is no doubt that China is looking to topple he U.S. dollar as the world's reserve currency. And this will happen over time. The Europeans want it - they are a rival in currency terms. The Asians want it - they want to stick it to an arrogant country which caused great hardship to Asia through the IMF in the Asian Crisis. And the oil exporters like Saudi Arabia, Iran and Venezuela all want it too. It will happen. The question is when and what will happen.

Central banks in the west are selling gold and buying toxic paper from banks, and are printing more money. Central banks in Asia and China in particular are buying gold on the other hand. Now what do you think is the most sensible strategy.Who gets your vote ?

Update:

. The Chinese have 1054 Tons of gold. Official data always mentioned 600 Tn of gold.