China Dumps Dollar, Goes for Gold!

We’re going to loop back around a cover some ground once again that we wrote about last month. In early March we noted that China had been buying gold without let up for 16 months in a row.

Now it is 17 months in a row. That looks like a trend to us.

China does not seem to think the U.S. dollar is as good as gold. Let’s take another look at what China is doing.

According to an April 14 update from the World Gold Council, the People’s Bank of China reported that March was its 17th consecutive month of gold purchase. That raises China’s official gold reserve by five tons to the 2,313 tons. That is nine percent of its total foreign reserves.

China is serious about gold. It has been the world’s largest gold producer for a decade.

What about its dollar position?

Earlier this year China’s monetary authorities explicitly advised its bank to pare back and limit its U.S. treasury holdings.

The government’s holdings of U.S. treasury securities (bills, notes, and bonds) peaked at $1.317 trillion in November 2013. At that time the U.S. national debt was $17.1 trillion

Compare that to its position today. China’s U.S. treasury holdings stand now at $683.5 billion — roughly half the 2013 position. So even as a major creditor of the U.S. has cut its exposure to our debt in half, our national debt has more than doubled to almost $39 trillion.

Think about that and you will understand why Washington is in a mess. As its spending continues to shoot the moon, with no sign of doing anything but continuing, the world’s second largest powerhouse has backed away from the dollar’s credit and geopolitical risk. But when you’re the biggest debtor in the world (the U.S.), you really need the biggest lenders in the world.

When Washington needs to borrow more, but creditors are scarce, what does it do to attract more of them? It has to raise interest rates. But wait! That means it costs more to service U.S. debt, and it slows the domestic economy which therefore reduces tax income.

That’s the rub.

But in a fix like that Washington does have an alternative.

PRINT!