If you have not yet read Part 1: Why Gold Is Undervalued available free to all readers, please click here to read it first.

Part 1 summarized gold’s technical position, the market position, made a value judgement against fiat dollars, described and quantified the paper market, and noted the long-term shifts of bullion into Asia. There are three big subjects left to deal with: the dynamics at the hear of the West-to-East flow of physical bullion, the scope for an accelerated deterioration in the purchasing-power of paper currencies, and the financial cold war between the advanced western economies and the Asian Shanghai Cooperation Organisation (SCO.

Understanding The Flow Of Gold Into China & Russia

China

China’s appetite for gold has only become obvious in recent years. In reality, we do not know how much gold China has imported. We only know that for whatever reason she appears to be importing significantly larger quantities than publicly admitted. It is worth bearing in mind that this started long before the Shanghai Gold Exchange was established in 2002; the original regulations delegated total control of gold and silver to the Peoples Bank (the central bank – PBOC) in June 1983. Given at that time the west was selling gold down to the $250 level, China has most probably been secretly stockpiling gold for the last thirty years.

The 1983 regulations appear to have been introduced to take advantage of freely-available supply. Between 1983 and 2002 there was significant leasing activity by European and other central banks as well as outright sales in addition to mine output. Furthermore, the bear market from 1980-2000 led to considerable divestment of privately owned gold vaulted in Switzerland. The following table summarizes the estimated effect.

Approximately half the above-ground stocks in 2002 appears to have changed hands since 1983. The principal buyers were the Middle East until the mid-1990s and India after the Gold Control Act was rescinded. No one has suspected China of acquiring meaningful quantities of gold during this period, but the timing of the 1983 regulations suggests otherwise. India’s demand between 1990 and 2002 was only 5,426 tonnes, with perhaps 2,000 tonnes smuggled in the seven years previously, leaving 68,424 tonnes unaccounted for. And while Middle Eastern oil exporters were certainly buying in quantity it is unlikely they would have taken more than 35,000-40,000 tonnes, which leaves 28,000-33,000 tonnes unaccounted for. Conversion of bullion into jewellery for the European and North American markets could have absorbed 5,000 tonnes at most, but equally there were other sources of supply such as Russia, which was forced to sell all her gold (507 tonnes) during the financial crisis in 1998, and potentially some net selling as a result of the Tiger economies’ crisis at about the same time.

There is only one logical conclusion: China passed regulations in 1983 to acquire gold bullion. This being the case, before 2002 she could easily have secretly acquired over 20,000 tonnes. And this explains why she was then happy to let her own citizens in on the act…