Gold - did you know?

The Silk Road To The Superhighway

The allure of Gold is timeless. All through-out history the beauty, preciousness and rarity of this metal has made it highly sought after. Gold continues to transcend time and to this day is still considered the ultimate store of wealth for people in every part of the world.

These traits lead to one of Gold’s strongest fundamentals - its value as a hedge against wildly inflating fiat currencies. Paper money not backed by Gold has and always will fail as proven throughout history. In fact, the first stage of Gold’s bull was primarily driven by the weakness of the world’s reserve currency, the US Dollar.


CHINA has such a huge stash of other countries’ money that it could, in theory, hand out bonuses equaling approximately a year's wages to all 700 plus million of its famously low-paid workers.

The country has passed Japan as the biggest holder of foreign currency the world has ever seen. Its reserves already exceed US$2 Trillion and are up from just under $4 billion in 1989. That’s a staggering 50 times in just over 20 years.


But China, it turns out, has held a similar position before. The current pile, much of it invested in Treasuries, is a result of China's selling more goods than it buys and of foreign money pouring in for the building of factories, apartment towers, office buildings and shopping malls. China is not alone; other developing countries are also piling up cash and trying to figure out what to do with it.


History offers parallels to the yawning United States trade deficit and the resulting accumulation of dollars in China. China sells to American companies almost six times as much as it buys, but this is not the first time China has been an export powerhouse. Ancient Rome, for example, found that it had little except glass that China wanted to buy. Pliny the Elder, or Gaius Plinius Secundus, complained about the eastward flow of Roman Gold along the Silk Road in exchange for Chinese silk. The Chinese only wanted the Gold.

Long-distance trade collapsed during the early years of the Dark Ages. But through the next several periods of rapid growth in international commerce — from A.D. 600 to 750, from 1000 to 1300 and from 1500 to 1800 — China again tended to run very large trade surpluses. By 1700, Europe was paying with Silver for as much as four-fifths of Europe's imports from China, because China was interested in little that Europe manufactured.

A longstanding mystery for economic historians lies in how so much Silver and Gold flowed to China for centuries for the purchase of Chinese goods yet caused little inflation in China. Many of China's manufactured goods remained much cheaper than other countries’ manufactured goods. This was the case until the early 1800's despite the rapidly growing supply of Silver sloshing around the Chinese economy. It's ironic that the United States in today's times has been calling for China to revalue its Yuan currency significantly higher so its own goods can compete with China’s cheaper produce.


1. One theory is that Chinese output was expanding as fast as the precious metals supply.

2. Another theory is that the Chinese were saving the Silver and Gold instead of spending it.

The same phenomenon has appeared today, as dollars inundating China have resulted in practically no increase in prices for most goods and services. (However, real estate prices have jumped in most cities which the Chinese are now prudently reining in to temper a potential bubble forming, if it hasn't already.)

With its annual Gold production of 300 tonnes per annum, China has also now exceeded the big top three of Australia (220t), South Africa (210t) and the USA (210t).

Its government has also opened up its local banks to its own citizens for Gold investing. As this demand grows within China, it is well noted that China's own production supply will not be enough to feed its nation’s citizens totaling one-sixth of the world’s population. The Chinese have a historical affinity to the Metal of Kings. China's own reserve bank (BOC) has stated as late as last year that it wishes to purchase 2,500t to add to its reserves, and it definitely has the US dollar reserves to dip into to do so. An order of this magnitude will take at least a decade to secure and will not be filled quickly in a bull market where demand is already outstripping global supply.


China and India have always held the world’s biggest populations as they still do today. India, with its 1.1 billion people, and China, with its 1.3 billion people, making up approximately two sixths of the global population, has always had the ability to absorb inflation under their strict management. Their huge populations work for less money than other countries, absorbing the inflation in the process. As the US dollar expands out to the rest of the world via the printing presses, countries receive these dollars in payment for what their citizens produce. The only way other countries, like the western developed nations, can absorb this money supply is via taking on huge debt subsequently paid for eventually by its citizens through higher taxes.


Between the 16th century and the beginning of the 20th century China and India held 50% of the world’s gross domestic product (GDP). As you have already noted, I am mentioning India as well here for I am trying to make a point. Labor literally does produce wealth, for all goods and services come from labor in one form or another, including labor of the mind.


It was not until the beginning of the industrial revolution beginning with Great Britain when labor was able to be leveraged by man’s mental abilities in a far greater and accelerated way than in all of recorded history. When we look back at the last 100 years, this leverage was primarily lead by a few factors such as the entry of fossil fuels and by inventions such as machinery via mankind’s intellectual labor. For example, harvesting advancements now only require 1 man and a machine to do the work it took 12 men to do in a day. There are multitudes of other examples which greatly accelerated the western world nation’s advancement over the nations with larger populations like China.


Yet today we have moved well into the communication age where all the vast intellectual labor and knowledge is now accessible to developing nations via the internet, cell phones, facsimiles and even satellite, to name a few of the mediums. China is one of these nations. Now combine a cultural affinity to Gold as a real store of wealth and labor, a strong work ethic and a 40% savings rate, and you have the makings for a return to the former 400 year period where this nation was one of two holding 50% of the world’s GDP!


China has an even easier time preventing domestic prices from rising these days, because modern banking techniques allow China's central bank to buy up the dollars and take them out of everyday circulation. The central bank has accumulated the country's immense foreign currency reserves in the process.


China and other developing nations have an interest in keeping the current US dollar reserve system going while at the same accumulating strategic assets. These assets that are being accumulated range very broadly across one main sector. That sector is commodities or needs such as Oil, Copper, Zinc, Steel, Tin and many more of the base metals. China is making trade agreements with multitudes of countries on the continents of Africa, Russia and South America to secure future supplies.


The Chinese people are like most people who are reading this very article, and that is they are becoming increasingly aware of the US dollar inflation. As stated above, even the Chinese government is opening investment vehicle options to protect its citizens from what is currently happening. So when businessmen in China invest, they are looking towards the ultimate store of wealth and protection against the deceptive theft of their life’s work through inflation. This store of wealth they are pouring into is Gold and Silver.

The Chinese are very savvy and prudent business people. This also extends to its government, which is unusual, and western governments could learn from. I have watched their political and business decisions for well over a decade now and have learned to take note of what this hugely populated nation is up to. There is no doubt the Chinese are very interested in the precious metals of Gold and Silver. This nation, from my observations, is definitely in acquisition mode. From this I would say here and now that following their strategy regarding precious metals and saving in them is a very prudent measure for the days ahead.

Until next time,

Simon Heaps

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