China the Dollar and Gold

The way China thinks about the dollar and gold affects every one of us on our precious Amelia Island.

The way China thinks about the dollar and gold affects every one of us on our precious Amelia Island. In an interview with the London Telegraph, Cheng Siwei, former vice chairman of China’s Communist Party’s Standing Committee, said China has lost confidence in the dollar (nothing new there), and it is buying massive gold reserves to protect itself… “Gold is definitely an alternative, but when we buy, the price goes up,” Cheng, now a global economic ambassador for China, says. “We have to do it carefully so as not stimulate the market.” As a policy, China will buy gold on dips, creating a strong floor for the metals. China’s buying ‚Äì the country has doubled its reserves to 1,054 metric tons ‚Äì also explains why gold has held strong despite a soaring market.

The world’s biggest gold miner, Barrick Gold, hears China loud and clear… Barrick is rushing to unwind its fixed-price bullion contracts, which would expose Barrick to swings in the metal’s price. Barrick is selling 94.8 million new common shares (17% more than the original sale, announced Tuesday) to help cover the $5.6 billion charge it will take to eliminate some of the hedges it has on 9.5 million ounces of gold.

AngloGold Ashanti and Randgold Resources are buying control of a deposit in the Democratic Republic of Congo (DRC) – one of the poorest and most dangerous countries in the world – containing around $22 billion of gold. Production in South Africa has fallen, and after eight straight years of price increases, miners are desperate for untapped reserves. The DRC is one of the last known frontiers of untapped gold reserves. If AngloGold and Randgold have even mild success, expect every mining company in the world to set up shop.

Betting against the majority usually pays off, but I‚Äôm still bullish on gold. The fundamentals are too strong. As our friend Steve Sjuggerud of Daily Wealth says, ‚Äúuntil the average American ‚Äì who laughed at the idea of owning gold last year ‚Äì starts e-mailing us asking us for advice, we’re buying.‚Äù he declared gold will stay above $1,000 this time around… Steve notes that in a real bull market, an asset will hit a new high as optimism surrounding the asset peaks ‚Äì as was the case with gold in March 2008. Then, optimism wanes and the asset price falls.

I think gold will hold on above $1,000 for another reason… the astronomical amount of money the Fed has printed into existence to fund the current bailout.