China’s Golden Corridor—Gold Reserves And Negative Yield
The comments below are an edited and abridged synopsis of an article by Marin Katusa
Earlier this year, gold prices hit highs in most major currencies; it also broke above $1,500, the highest it’s been in 6 years. This shouldn’t be a surprise, with a trade war between global economic powers, global debt spiraling out of control, and Iran and North Korea building up weapons.
Katusa discusses the freefalling Chinese yuan, which has been depreciating since 2014. The effects were magnified when the Chinese government let the yuan fall below its symbolic threshold of 7 yuan per dollar. Currency devaluation aside, it makes sense to own assets that hold their value, physical assets like gold that make for excellent hedges against currency devaluation. So it should come as no surprise that central banks have been buying gold—especially China’s.
So far this year, China has acquired 2.7 million ounces (92.5 tons) of gold. At a spot price of $1,500, that’s $4 billions’ worth of bullion.
As a country that exports more than it imports, China wants to keep its currency value low. It will likely accumulate more gold over the coming months if the yuan continues to weaken.
The US-China trade war has not only affected US-Chinese economies, but global trade as well. To make matters worse, it’s getting harder to find somewhere safe to park cash. In times of chaos, government bonds are usually a standard go-to investment. However, many government bonds now have a negative yield.
There is likely more devaluation to come, thanks to the soaring amount of negative yield government debt (currently over $15 trillion). More alarming is the amount of corporate debt that has also hit negative yield. Currently there is over $1.2 trillion in negative yield corporate debt.
Just a few years ago there was virtually none. There is blood in the streets of the bond market, and investors have no choice but to look for other places as stores of value.
After all, it’s that or burning your cash, buying bonds in countries with negative interest rates. With yields the least attractive they’ve been in years, investors and central banks are turning to gold. And with the recent surge in the COT long positioning and the price of gold smashing through $1,500, many pundits are saying, “This is it!”
From a fundamental perspective, gold is strong right now. Being positioned in the best gold developers and gold producers offers tremendous leverage to rising gold prices. The unrest in China, the trade war and the rise of negative yield debt aren’t likely to be resolved soon. In the meantime, many will flock to the safest haven they know—gold.