PRC Tightening And PRC Mercantilism

The U.S. stock market's in tatters because worries over future tightening by the People's Bank of China have amplified worries about bank earnings. The U.S. dollar has continued to shoot up today, and gold has sunk well below $1,120 - even below $1,110.

It's well known that the Chinese are turning to gold. There's been an ongoing debate about the PBoC adding gold to PRC reserves so as to diversify those reserves out of the greenback. The public has been exhorted to buy some gold. That exhortation could be to support domestic miners and producers, but the central bank and other government agencies seem to be doing a good job of it already.

The PRC is, of course, mercantilist. Mercantilism, in essence, consists of the government rejigging the market so as to secure national advantage. High PRC growth is in large part due to monetary mercantilism, which enables the central bank to create new reserves out of export earnings. New renminbi are created every time an exporter sells foreign currency to the People's Bank of China. (They have to.) This kind of policy has a sweet-deal aspect to it if the resultant money-supply expansion is channeled into more credit for export-driven industries. It's a lot like pyramiding a stock that never goes down.

However, there have been recent overheating concerns. In restraining growth, the PRC has found that gold is knocked down in consequence. There's another opening for a sweet side deal as a result. The PRC government can kill two birds with one stone: turning down the money-and-credit heat, which has to be done anyways, and knocking down the gold price to a level more acceptable for purchases. Given today's price as compared with the price before the PBoC announced the reserve-rate hike, gold's at a discount of more than $40/oz. The greater the discount, the smarter the purchase. And, as we all know, the PRC is mercantilist.

I think there'll be more announcements of monetary moderation in the coming weeks, and in the coming months we'll find that sales of gold in (and to) the PRC have gone up. Given the dovetailing of timeliness, it makes sense for the PRC government to keep tightening right now...and letting the gold market know it.