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Friday, September 2, 2016

Chinese Buy Gold, Sell Treasury's...Should You?

China has run a $4 trillion trade surplus with the US since 2000.  So, no shock China is the largest single holder of US Treasury debt (outside of the Federal Reserve) and has accumulated nearly a trillion dollars in US Treasury debt since '00.  In total, China now holds $1.24 trillion in US Treasury bonds.

Despite China continuing to run perpetually larger trade surplus' with the US, China ceased accumulating Treasury debt (net) in July of 2011 (coincident with the US debt ceiling debate...and the peak in Gold prices) and has been net selling US Treasury debt since.

Since July 2011, China has collected $2.2 trillion in US trade surplus dollars and recycled none of them (net) into US Treasury debt.  This after China recycled 50%+ of it's trade surplus into US Treasury's over the previous 11 years.  So what has China been buying with all those dollars since 2011?  Among other things, buying an awful lot of gold.  Perhaps as much as a trillion dollars worth since July 2011...and on this ongoing gold buying, perhaps 5,000 tons but even potentially in excess of 10,000 tons, gold prices have fallen by a third!?!  Conversely, on the buyers strike in Treasury's, yields fell by a third?!?

Typically when buyers disappear and new flow continues and existing stock is at record levels, prices fall and yields rise to entice new buyers.  However, in the case of US Treasury bonds, we are to believe that domestic sources of buying (US pensions, insurers, banks, etc.) have taken over buying since year end 2014.  Buying Treasury assets yielding far below domestics needed rates of return (essentially laddering into 0.5% to 2.5% yielding assets vs. 7.5% plan payouts)?  Where did these domestic sources get the $1 trillion without selling other asset classes?

Who Is Buying Treasury's?
The chart below highlights US Treasury issuance, by period, and what source purchased the debt.  Quite noticeably, the most recent period has seen a near abandonment of US Treasury debt accumulation by foreigners simultaneous with the Fed's cessation of net new QE.

The chart below focuses on the foreign portion of Treasury buying (total foreign buying called out) & breaks down the buying by grouping (Japan=blue, BRICS=red, BLICS=grey (Belgium, Luxembourg, Ireland, Cayman Islands, Switzerland), RoW=mustard, OPEC=black).

Noteworthy was the cessation of Treasury buying by the BRICS (those nations running dollar trade surplus') as of 2011...entirely replaced by the BLICS from 2011-->2015 (banking nations with little or no trade surplus with which to make the purchases).

The chart below highlights when QE began, rates rose during each period of QE and fell when QE was tapering or ceased.  Likewise, when China & the BRICS ceased recycling dollars into Treasury's in 2011...rates fell.  And when the Fed and the remainder of Foreign Treasury buying ceased at year end 2014...rates fell even further?!?

Trade Surplus Recycling:
From 2000 to July of 2011, China ran average annual trade surplus' with the US of $180 billion and recycled about $90 billion annually or 50% of that surplus into US Treasury's.

During this time, gold rose $1400 or 650% (gold traded as high $1,911 and closed in excess of $1850 but the numbers shown below represent monthly averages).

Since August of 2011 to present, China ran record average annual trade surplus' with the US in excess of $300 billion and (on a net basis) recycled none of those record dollars into Treasury's.

What did the Chinese buy with all those dollars previously used to purchase Treasury's?  The data is pretty unequivocal the Chinese have been buying gold...assuming the same 50% of that surplus is utilized to buy gold from 2011 forward (instead of Treasury's) this is about $150 billion a year...and a $150 billion a year can buy a lot of gold.  Especially since the price of gold fell by nearly a 1/3rd since China began it's gold buying spree.

Since July of 2011, two of the largest and most important asset classes in the world, US Treasury debt and gold valuations, have been moving in contradiction to supply and demand data.  US Treasury rates have fallen by a third since the vast majority of previous buyers have ceased accumulating...and gold has fallen about 25% on increasing physical demand.  These are simply not the hallmarks of a free market.  However, the only thing investors should be more afraid of than a free market correction or potential market crash is the absence of free markets...which appears to be the present situation.  Of course, this leaves so many open questions...
  • What will China do with their newly acquired large stockpiles of gold?
  • Is the US (or other large entities) actively and covertly helping to rig gold prices to help supply China with this gold?  If so, why?
  • Who is supplying all the gold which China is purchasing?
  • Who exactly is acquiring all the US Treasury debt since it simply isn't credible US domestic sources are doing so and the largest of buyers have all ceased buying?


  1. <<< Among oth<<< Among other things, buying an awful lot of gold. Perhaps a trillion dollars worth since July 2011>>>
    Chris, I've really enjoyed your blogs on demographics, but I'm surprised by today's one. For the record: I'm a gold bug. I own and trade gold/miners. IMO there is absolutely no proof that China has bought 10,000 tons of gold. IMHO you just too simplified "if not treasuries then gold". As matter of fact China does have big trade surplus wit the US, but it has almost as big deficit with other countries. Also besides treasuries there are other dollar assets like agency debt. Yes, the dollar hoard grew very quickly before 2014, but it was in big part a result of hot money flowing to China (aka carry trade). And it has reversed dramatically since August 2015. As a gold bug I think that Chinese CB hasn't been buying much of gold. I hope it will start buying when Price of Gold will be at $5,000 to take it to $10,000.

    I hope you'll have a great Labor day!

    Best, Ilya

    1. What China intends to do and they made no secret of this ( you have to search under Chinese language terms), is take control of the pricing and the entire production chain of gold from mining, refining, and financialization.

      I suggest watching this Avery Goodman interview for some insight to the Chinese strategy.

      Use Google translate. Periodically search news for the Chinese terms: "Chinese gold strategy", "Silk Road Gold Fund", "RMB internationalization", "New Development Bank". And when you see an important buzz phrase in one article, take that translation and search for that. Russian news also yields some interesting stuff. You'll find the foreign media very cognizant of Triffin's Dilemma and the Dollar Trap the world is in.

  2. Oil. The decline in surplus dollar purchases of US Treasuries since 2011 is almost exactly matched by the increased dollar cost of increasing oil imports.

    1. Joe - the collapsing price of oil since 2014 just doesn't support this theory...a 55% decrease in oil prices from 2013-->2016.

      Average annual oil price below:

      2008 $91.48
      2009 $53.48
      2010 $71.21
      2011 $87.04
      2012 $86.46
      2013 $91.17
      2014 $75.60
      2015 $45.15
      2016 $39.55

    2. Average oil price since 2011 has been about $71. China has imported a little over 13 billion barrels of oil in the last 5 1/2 years. $71 X 13 Billion = $923 Billion. That comes pretty close to your missing $1 Trillion.

    3. Joe - I like that you are thinking and good question.

      From '00-->'11 50% of China's surplus dollars went into Treasury's...the other 50% were used to buy oil and other dollar denominated commodities & "stuff".

      From '11-->'16 China used 50% ($1 T) for oil & other dollar denominated "stuff". Where the other 50% ($1 T) is what we're talking about.

      Sorry I wasn't clear about this.

  3. Chris - USTs are being purchased by former producers of Eurodollars. Jeff Snider of Alhambra Investments shows clearly that the Eurodollar market (i.e., dollars held abroad by foreign banks) has declined precipitously since August 2007. Those EDs that remain in the shadow system are moving into USTs because they still offer a small yield, as opposed to the NIRPy world of Europe and Japan. ED creation around the world, a tacit agreement that ALL banks, even non-U.S. banks, can create FRNs through derivatives generation, is failing, which is driving deflationary tendencies in the EU and Japan especially. The ED system is collapsing, driving down yields, and QE is accelerating this process as "quality" collateral is pulled from the system. You can see the Fed's conundrum.

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