STAFF NEWS & ANALYSIS
China Wary of Gold 'Bubble'
By Staff News & Analysis - December 04, 2009

The Chinese authorities have given the clearest indication to date that they view the surge in gold to an all-time high of $1,217 (£730) an ounce as a speculative frenzy. Hu Xiaolian, the vice-governor of the central bank, said Beijing would not buy gold indiscriminately. "We must keep in mind the long-term effects when considering what to use as our reserves," she said. "We must watch out for bubbles forming on certain assets and be careful in those areas." China announced this year that it had quietly doubled its gold reserves to 1,054 tonnes, the world's fifth largest holding. India has also joined the rush, gobbling up half the IMF's gold sale. News that the rising powers of Asia are shifting a chunk of their fast-growing reserves into gold in a flight from Western paper currencies has emboldened investors to take out large gold bets on the futures markets or through exchange traded funds (ETF), leading to the parabolic rise in price over recent weeks. However, officials in Beijing are aware that China's $2.3 trillion reserves are now so enormous that the central bank cannot buy much gold without distorting the price, so they have adopted a de facto policy of buying in a calibrated fashion each time prices fall back to their rising trend line – "buying the dips" in trading parlance. Experts say that China is putting a floor under the gold price but does not chase rallies once they are under way. – UK Telegraph

Dominant Social Theme: Be careful of this bubble!

Free-Market Analysis: So the Chinese think that gold is in a bubble, eh? Those Chinese are always sensitive to the slightest hint of a bubble it seems. Of course that didn't prevent them from amassing a portion of their some US$1 trillion in dollar reserves at the height of the Western monetary bubble in the mid-2000s. And while they are apparently averse to a gold bubble, the idea that the entire Chinese economy (the larger corporate/banking part anyway) could be one large bubble seems to escape the same powers-that-be.

We are skilled bubble watchers (or at least we have been watching bubbles for a long time from a free-market perspective) and we think the Chinese ought to be a lot more concerned about the "bubble" in the American dollar, American treasuries and the over-all emergent bubble in Western economies as central banks re-inflate with every ounce of their collective breath. The Chinese ought to take a close look at their own economy with its empty, immaculate malls, factory ghost-towns and general overcapacity.

Of course, there are other issues involved. If you held a couple of trillion in reserves and too much of that was in unsound paper, wouldn't you want to buy gold, too? The only trouble is that the price of gold keeps going up. And now that you've announced you're buying (China, that is), the gold market has an effective floor on it. What will the Chinese tolerate before they head back in to buy? A five percent correction? A ten percent correction?

But maybe you won't see those kinds of corrections because the Chinese have already announced they're buying on dips. People will hold their gold now. It almost must surely go higher – or so it seems. What are the Chinese authorities to do? It's already known they're buying gold. All they can really do at this point is claim the market is over-bought. It's a bubble! Be careful!

G. Edward GriffinNOTED: How far one of our favorite contributors, G. Edward Griffin (pictured left), has come. Used to be his famous anti-central banking book about the Federal Reserve, The Creature From Jekyll Island," was an underground classic. Now Senators are quoting from it! See below, in this article from the political newspaper, The Hill …

KEY DEMS BACK BEN BERNANKE FOR SECOND TERM AS FED CHAIRMAN: Sen. Chris Dodd (D-Conn.) and other Senate Democrats on Thursday strongly backed Federal Reserve Chairman Ben Bernanke's nomination for a second term. Dodd, the chairman of the Senate Banking Committee, and Sen. Tim Johnson (D-S.D.) both immediately endorsed the Fed chairman in their opening statements at Bernanke's confirmation hearing before the panel. "I believe you are the right leader for this moment in our nation's economic history and I think your reappointment sends the right signal to the markets," Dodd said. Sen. Evan Bayh (D-Ind.) said he would also support Bernanke's nomination. While Bernanke appears headed for a second term, the vote on his confirmation will likely be far more divided than the overwhelming support Fed chairmen typically receive. … "I will do everything I can to stop your nomination and drag out this process as long as I can," said Sen. Jim Bunning (R-Ky.), who has long lashed out at the Fed. "YOUR FED HAS BECOME THE CREATURE FROM JEKYLL ISLAND."

After Thoughts

Here's our question … Are they trying to talk the market down? Are they really concerned about a gold bubble? They're bubble sensitive now, all of a sudden. We not sure it's a coincidence.

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