Gold Videocast: China’s Growing Prosperity & Appetite for Gold (Video)

Peter Schiff highlights the differences between the Chinese and American economies. More importantly, he explains why China doesn’t want the rest of the world to know how much gold it owns or intends to buy.

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As the price of gold continues to weaken, most of the attention has been on the United States and the US dollar, which has enjoyed a rather spectacular rally in recent weeks. [This is based] on the false premise that while Europe is about to launch its own version of QE and that Japan is going to continue with its quantitative easing, the United States is the only major central bank that’s going to be getting out the QE business – that we’re going to stop our quantitative easing, and in fact, be the first major central bank to begin to raise interest rates. The currency traders are trying to get ahead of that widening rate gap that they believe is going to be developing between the US, which will have higher rates, and Europe and Japan, which will still be at zero and doing quantitative easing. Of course, all of this is false, because the United States is not going to be ending QE or raising rates. In fact, I think we’re going to be doing more QE than Europe and Japan.

The best growth for the US economy happened in the second quarter. It is downhill from there. All of the data and all common sense points to the fact that we are headed back to recession. We should be in recession by early 2015 unless the Federal Reserve reverses course and starts back up the QE engine. The question is – when will people figure out that that’s what is going to happen?

Right now everybody assumes that America is an island of economic growth and tight money in a sea of recession and quantitative easing. That is not the case. Our economy is weaker than the economies in Europe and Japan. It is more addicted, more dependent on cheap money. Eventually those betting on the dollar are going to start to bet against it, and then you’re going to see a spectacular reversal in the price of gold when investors realize that there’s no safe haven in any country.

But they might turn their attention from the United States to China. Because if the dollar and the US are not safe havens, then what major economy potentially could emerge as an alternative? I think China is particularly vulnerable to renewed weakness in the dollar, being that China is the world’s largest holder of dollars. My guess is that the Chinese have used the recent strength of the dollar and weakness in the price of gold to move more of their foreign exchange reserves – which are the world’s largest – into gold.

I think one of the stories that really shines a light on the difference between what’s happening in the Chinese economy and what’s happening in the American economy is the recent launch of the iPhone 6. Nobody really talks about it this way, although I have read articles about all the phones that are being purchased in the United States and smuggled into China.

My take on it is a little bit different. Think about these two nations. [In] the United States, you have a bunch of unemployed people who have nothing better to do with their time than to wait on long lines to buy iPhones that they really can’t afford and they’re not even going to use. They’re just going to flip them, and they’re going to make a few hundred bucks selling them on a black market where the phones are going to be on route to China.

The Chinese – who are making so much money – are paying $3,000 for iPhone 6s. Three thousand dollars. They’re so excited to get their hands on the latest technology, they’re willing to pay ten times the price. And more importantly. if they just waited two or three months, they could buy those phones legally in China – the exact same phones for 90% less money. Yet the Chinese are so prosperous that they can’t wait to get their hands on this latest phone, even though they can wait a few months and get 90% off. They don’t care. They’re going to throw down $3,000.

What a difference between these two economies. It really shows you where the economic growth is, where the wealth creation is. It’s not the people who are queuing up to buy phones for the Chinese. It’s the nation that can afford to pay those insane prices for those consumer electronics. That’s where the job creation is, that’s where the wealth is, that’s where the growth is, and that’s where the gold is going to be.

We don’t know what China’s official gold holdings are because the last time they reported was a few years ago, and they only had about 1% of their total reserves in gold, which is laughable. If you think that China still only has 1% of their reserves in gold, then the joke is going to be on you.

I think the main reason that the Chinese aren’t being more forthcoming with respect to how much gold they’ve already bought is because they don’t want people to know how much gold they still intend to buy. Because I think China can read the writing on the wall, and they understand what a lot of people don’t. They want to get their hands on as much gold as they can and they want to pay as little as possible for it. The last thing they want to do is telegraph to the markets how much gold they’ve already bought, because that would give people an idea about their appetite and what they’re planning on doing.

So I think they’re quietly accumulating as much gold as they can, which is why I think around this $1200 level or slightly below there will be tremendous support coming in for the metal, because there are big buyers and it’s not just China. You have emerging markets in general who have been buying gold and who I believe will continue to accumulate on any weakness because they need to shore up their currencies. I believe none of this is being lost on the Chinese, who are sitting back and doing everything they can to position themselves for the next major decline in the value of the dollar and then spectacular rise in gold. Because when the confidence in the dollar goes, where are people going to go?

Right now, they’re thinking, “Well, Europe is going to print, Japan’s going to print, but I’m going to buy dollars because they’re not going to print anymore. They’re going to be raising rates, they have a strong economy.” When they realize – “Wait a minute. The US is in just as much trouble, if not more, than Europe or Japan, and now they’re back in the QE business only in a bigger way than either of those countries.” [When they realize that,] where are people going to go? They’re going to go to gold and maybe they’ll also go to the Chinese RMB, if that currency is increasingly back by the safety of gold. I would suggest that you do something similar. Personally, I’d be making sure your own personal portfolio is backed by gold, and buy it while it’s still cheap.

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