Taipan Daily Asks A Pregnant Question

The question is, "Does China Want a Lower Gold Price?" The answer given is "yes," in the short term. On a more quotidian level, the PRC is flush with U.S. dollars and has an incentive to diversify.

In the long run, China craves power (or at least the mandarins who run the place do). Economic power, financial power, military power, you name it.

In getting from here to there – from a world where America is top of the heap to a world where China is – China will have to do a few key things to see its geopolitical ambitions met. It will have to dig out from under a mountain of paper dollars. And it will arguably have to build up a massive stash of gold, much bigger than the one it has now.

The strategic nature of this endeavor creates some odd incentives in the short term. Think of two large investors: one who is trying to quietly buy up the shares of a small public company, and another who is trying to get rid of a massive stake.

Gold is like the small public company in this analogy. The total “float” of gold available for purchase is tiny – a few trillion dollars’ worth at the maximum. (Much of the world’s gold is in private hands and not for sale.) China is like the large investor trying to quietly buy up shares.

Given the intimate knowledge of its own long-run plans, China likely wants to exchange dollars for gold at the most favorable price possible – which, here and now, means a lower gold price. This is no different than a large investor wanting to get the best average cost on his position.

China is like the other large investor – the one who wants to get shed of a massive stake – in terms of its divesting its mountain of dollars. In this case, it is a higher price (i.e. stronger dollar value) that is desirable, as it means a better rate of exchange on greenbacks going out the door.

So, a rising U.S. dollar gives the Chinese authorities a chance to diversify without ruining the greenback and injuring their own holdings while doing it.

Regarding geopolitical motives, some talk along that line is surfacing in the PR of C. Zero Hedge has a post whose subject is 'Senior Chinese Military Officers Join Iran In Delivering "Punch" To U.S., Propose Selling Treasuries As Arms Sales Punishment.' A perhaps unrelated follow-up post reports that "Chinese Reserve Managers Notified That Any Non-USG Guaranteed Securities Must Be Divested."

It hasn't been Chinese policy to let political considerations trump investment decisions, at least so far...