Tuesday, September 22, 2009

A Question on China

In a recent comment on this blog, Belgian asked Ender, "Is there already enough goldmetal within Chinese borders to let freegold break free ?"

This got me thinking. Back in 2001 there was some discussion of "who is Big Trader?" I believe that Belgian took the position that it was probably Saudi Arabia. But then it was pointed out that Another had said "Big Trader" was "HK people", meaning Hong Kong.

Big Trader - circa 1997
MK: "As implied by ANOTHER's own words, his motivation for these postings was the discovery by "big traders" in the Far East of this opportune facility to buy gold at ever lower prices."

Another: "When everyone that has exchanged gold for paper finds out it's real price, in oil terms they will try to get it back. The great scramble that "Big Trader" understood may be very, very close."

"The problem is, "if the CBs don't expand their roll as "primary suppliers" LBMA will implode and in the process create the greatest bull market in oil and gold the world has ever seen. That is why some "Big Traders" are holding ONLY gold as events unfold. Interesting, don't you think?"

"That's why "Big Trader" and his bunch closed out all paper and pulled in bullion. Don't worry about the CBs selling everything, the market is huge compared TO WHAT THEY HAVE! And Comex is nothing, if "only a silly game". Worldwide trading in gold could be cut in half and still equal all the metal in existance!"

"Well a funny thing happened right after the Gulf war ended. What looked like big money before turned out to be little money as some HK people, I'll call them "Big Trader" for short, moved in and started buying all the notes and physical the market offered. The rub was that they only bought low, and lower and cheaper. They never ran the price and they never ran out of money. Seeing this, some people ( middle east ) started to exchange their existing paper gold for the real stuff. From that time, early 1997 LBMA was running full speed just to stay in one spot! In other words paper volume had to increase to the physical volume on a worldwide scale, and that was going to be one hell of a jump. It could not be hidden from the news any longer."

And one more from JTF (Oct. 12, 1997): "My assessment is the following: The Central banks began the gold market manipulation by offering private gold to brokers. Since they could use their own real gold as "insurance", they did not need to sell their own gold. As the paper gold (the derivative gold?) became popular, all the trading of US$/oil/US treasuries became based on the paper gold method. Eventually "Big Trader" or some other individual stepped in and started pushing down the "paper" price of gold. Other traders, possibly those selling oil decided that they wanted to go back on the gold standard, and wanted real gold. Now however, the paper trading volume was so high that the Central Banks could not possibly maintain control of the markets, let alone supply enough real gold to cover all demands. If we are now talking about the CB selling of 1/3 to 1/2 of their gold, the public will find out, with catastrophic consequences, regardless of how "worthless" that gold they were told is. Looks like the choice between the proverbial rock and the hard place! Is there really any gold in Fort Knox?"

One interpretation could be that the exposition of the daily trading volume of the LBMA on January 30, 1997 was driven by massive Hong Kong buys, in essence, busting open the gold for oil charade of the paper markets. What followed were posts by "Big Trader" (HK?) and Another (BIS?) explaining what had happened, in their cryptic way, the only way they safely could.

The logical question that follows is "did these HK purchases require the physical transfer of gold to HK in 1997, or just the 'paper cornering' of it?"

Another clearly said that the CB's would have to step in as primary suppliers or the whole thing would fall apart.

The Day Backwardation Came

Well, two years later on May 7, 1999 we had the BOE announcement and "Browns Bottom" where the Bank of England became a primary supplier of 400 tonnes.

This action was followed four months later on September 26, 1999 by the 'Washington Agreement on Gold' during the IMF meeting in Washington, DC. Under this agreement, 15 European CB's agreed that no more than 400 tonnes of gold (between the lot of them) would be sold in any given year. This agreement was in direct response to "Brown's Bottom" (and I'm guessing to prevent rogue politicians from doing what Gordon Brown had done with "the people's gold").

Three days later, on Sept. 29th, the paper gold market almost imploded. On this one day, gold went into "backwardation"!

Please CLICK HERE and look at the GOFO rates on Sept. 29, 1999 (and those just before and after).

And here is a graph showing the downward spike of "backwardation" on that day:

It is also interesting to follow the comments from that day in the USAGold forum archives. If you read the whole day you can see how sentiment changed within the period of one day. Something must have happened behind the curtain on that day. Click here and read from the bottom up. You will witness a shift from the early morning before the markets opened, through the trading day, and ending on a different note at the end of the day. Interesting in hindsight, knowing that was the day that backwardation came!


Now jump forward 10 years to 2009.
April 24 (Bloomberg) -- China boosted its gold reserves by 76 percent since 2003 and has the world’s fifth-biggest holding by country, said Hu Xiaolian, head of the State Administration of Foreign Exchange.

Then, September 3, 2009, Hong Kong announces its wish to recall its physical gold:
Hong Kong recalls gold reserves, touts high-security vault
In a challenge to London, Asian states invited to store bullion closer to home

HONG KONG (MarketWatch) -- Hong Kong is pulling all its physical gold holdings from depositories in London, transferring them to a high-security depository newly built at the city's airport, in a move that won praise from local traders Thursday.

Also in 2009, we have the IMF announcement that it will sell 403 tonnes of gold. (There's that 400 tonne number again!) We also hear that China might like to buy that gold from the IMF. And it is also interesting to note that IMF gold is actually the "membership fee" of its member nations. It is even possible that the IMF gold vault only contains the paper promises of its member nations. But that is a subject for another day.


So let's recap our scenario. Prior to 1997 we have an "oil for gold deal" that is run through the paper gold market. It is a means of price suppression so that private gold will be sold to "buyers in the know" at ridiculously low prices. Then right at the beginning of 1997 we have Hong Kong entering this market - as a buyer - "to get in on the deal".

Then, on January 30, 1997, the monstrous paper volume is exposed under mysterious circumstances. We then have the appearance of "Big Trader" and "Another" on the only internet gold message board of the time, explaining what is happening and how individual gold investors should react.

The events that followed over the next 12 years, including the price rise from $265 per ounce to $1015 per ounce (383% rise so far), seem to confirm that something happened in 1997 to change the gold market.

My Question

Back to Belgian's question to Ender: "Is there already enough goldmetal within Chinese borders to let freegold break free ?"

Something else happened in 1997 that may be relevant in the context of all of the above.
From Wikipedia: "Beginning as a trading port, Hong Kong became a crown colony of the United Kingdom in 1842. It was reclassified as a British dependent territory in 1983 until the transfer of sovereignty to the People's Republic of China in 1997. <--

"Joint Declaration of the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the People's Republic of China on the Question of Hong Kong, "The Government of the People's Republic of China declares that to recover the Hong Kong area (including Hong Kong Island, Kowloon and the New Territories, hereinafter referred to as Hong Kong) is the common aspiration of the entire Chinese people, and that it has decided to "resume" the exercise of sovereignty over Hong Kong with effect from 1 July 1997."

BBC: On this day in 1997
July 1, 1997: Hong Kong handed over to Chinese control

Hong Kong has been handed back to the Chinese authorities - ending more than 150 years of British control.

So my question to all of you is this: Do you think the 1997 Chinese recovery of Hong Kong from the British was related to a substantial 1997 shift in Hong Kong's accumulation of gold metal from the West?



SatyaPranava said...

i'm speechless....though my focus was on the middle east at the time, and much shallower...very intriguing observation.

has taiwan been buying up gold too? :)

FOFOA said...

75.94 on the USDX. This is a stealthy move as NYC sleeps. They have been guarding 76 like a meaty bone. Something may be in the works.

Anonymous said...

I read China is the biggest producer of Gold in the World...is this true?

Anonymous said...

September 26th, 2009. That's when the current European Central Bank Gold Agreement (CBGA) on sales expires.

Has this changed?
Or will it go ahead?

Anonymous said...

Another question : How will China get its right (just-proportionate) weight in the IMF ?
And has it to do with the 400 tonnes IMF gold ?

If "gold" (wealth-reserve) increasingly plays a role in Re-balancing global power,...then we definitely stay on the freegold trail as architected by the ECB.

London - New York - and now Hong Kong (Dubai) as " gold vaults ". (West-Center-East)

A change from 2 to 3 players (forces) is a dramatic change.


Jay Midnyte said...

Good call FOFOA

Tehran Dumps Dollar For Euro In Foreign Reserves

Mantis said...

China has been following a Tortoise economic model since Mao's death. In fact, it is the way they have typically operated. The West, especially New York and London, follows a Hare economic model, and has been since the Industrial Revolution. Now the Hare is tired. Yes, the UK delivering Hong Kong back to the Chinese was meaningful for gold, but the West did not realize it until...well....very very recently. For perspective, also consider how Macau has changed since the Portuguese relinquished control back to China in 1999.

Also consider that, although China is encouraging its people to buy gold and silver, since 1997 China has more often than not been a net seller of silver.

Larry C said...


The LTCM bailout was also put together on Sept. 29, 1999. Could there have been gold derivatives that had something to do with the backwardation in GOFO?

RossL said...

Here's a wild idea.

Suppose that "Big Trader" in Hong Kong has been demanding delivery and accumulating small tranches of physical for the last decade. All along they would sell short paper gold in order to keep the price from running away.

So after 10 years they have a large stash of gold and silver bars and a big big short position.

Fast forward to the recent few weeks. China declares that deriviative contracts will not be honored. Surprise! The paper is no good !

That is all pure speculation, of course.

Shanti said...

@anon 12:10

Central banks’ renewed agreement on gold sales

On 7 August 2009 the ECB and the 16 national central banks of the euro area, in cooperation with Sveriges Riksbank and the Swiss National Bank, issued a joint statement whereby they committed to achieve the gold sales already decided or to be decided through a concerted programme of sales over a period of five years, starting on 27 September 2009. This renewed agreement immediately follows on from the previous five-year agreement that took effect on 27 September 2004


Mantis said...

I like the "pure speculation" of RossL. (smile)

Consider further that Hong Kong has recalled its gold reserves from London.

FOFOA said...


I agree. I liked it too.

And here's one more piece to the "pure speculation" puzzle. I'm surprised no one picked up on this in the way I read it 9 days ago when Jim Sinclair posted it.

Central Banks Must Agree Global Clearing Supervision, BIS Says
Sept. 14 (Bloomberg) -- Central banks must coordinate global supervision of derivatives clearinghouses and consider offering them access to emergency funds to limit systemic risk, according to the Bank for International Settlements.

Why a clearinghouse? Because it guarantees everything that passes through. If one party defaults, the clearinghouse covers.

Why Central Banks? Because no one else can possibly guarantee PAST derivatives. It's a guaranteed loser. Only CB's can print from thin air.

Why the BIS? Because it is the CB of CB's. It can tell the others what to do.

Why now? Because China is going to collapse the house of cards.

This is a politically acceptable route to global hyperinflation. It is a scorched earth escape for the bankers.

This would be a de facto guarantee of $1 quadrillion (thereabouts). In global base money terms, this is a 20,000% increase. That's Zimbabwe in 2007. Crazy, huh? That's the way I read it.

The funny thing about hyperinflations... the first one to get the new bills actually scores. He gets to spend them at the old exchange rate.

Here was Sinclair's take:

With this being the incontrovertible set of facts:

The Bank for International Settlements is for the first time proposing the world’s central banks take over the financial risk of the entire mountain of more than one quadrillion one hundred and forty four trillion dollars (valuation before the change to "value to maturity" method valuation of nominal value of OTC derivatives) of OTC derivatives created from 1991 to 2008.


SatyaPranava said...

rossL: love the train of thinking. that would be a move that would give china two queens on the chessboard!

fofoa: if you notice that move last night (and i was watching it live), was damaging, and IIRC, it came from about 76.10 and straight down to 75.82 or something.

but in response, it looks like when NY was open at about 1pm, they went down into the .80s again, and NY shot it up to 76.60 in a heartbeat. very interesting game going on. tonight looks pretty quiet (though the tel aviv opening has the dollar shooting up).

it's so funny (sad?) that there's a war going on right now, and most americans think its in afghanistan or pakistan, or iraq...and it's right on the trading floors and the ether of electronic trading (at least that's how i'd articulate it).


#79 said...


What do you think the probability is that Ft Knox is largely empty? -Or do you think the paper gold suppresion scheme has been so wildly successful that little physical gold has had to be released?

FOFOA said...


I truly do not have a strong opinion on Ft. Knox. It's one of those 50/50 things that could go either way. I can think of equal reasoning in each direction. If I had to say, I would say I will be surprised if it is more than half spoken for. I will be really surprised if it is empty.


FOFOA said...

I will add this. If it is empty when the dollar collapses, we'll likely see some public lynchings. And I would guess they are aware of this possibility.

Remember, they can still print and buy gold with that paper. Have you heard the rumors that cash4gold is actually a Fed backed program? I haven't given much thought to the veracity of those rumors, but they are interesting.


Stephen said...

During the years 1992-July 1997, my company out of S.F. CA. was in a joint venture project with CITIC (the first Chinese free enterprise inside China, headed by a nephew of Mao ) many probing questions came my way about Gold and America, my ignorance about these issues are self explanatory now, I can verify what seemed a curious interest in the subject at the time.

Stephen said...

Question to FOFOA, Currently I have a Motion Picture Project under development exposing the CB gold story as a whistle-blower concept. with world class Director and Cast, (50 Million Budget for Principal Photography) currently funded by a "negative pickup" which does not insure the integrity of the storyline. Do you think this kind of Budget could be funded from the best of breed Gold Companies ?

FOFOA said...

Hello Stephen,

Just curious, do you know of a woman named Cecelia Mou? She just goes by "Moe".

Are you aware of this film?

In answer to your question, I doubt you would find funding there.

Do you have a website for your film?


Stephen said...

I was prompted to ask after reading the ABX story. There is always creative interference with a "negative pickup". Outside the industry investors are passive.

Stephen said...

In reponse your question about Hong Kong 1997, from boots on the ground.

The fever pitch that existed for Hong Kong residents to exit the colony was dominant, with gold is problematic, The British loaded the boats with its bullion before July 1st.

Stephen said...

Could the PRC have mandated a proxy in HK to accumulate bullion ? yes ,
however in that era funds for mandated targets, were very very slowly executed. And the protocols necessary to implement should have come to the attention of the British.

Stephen said...

As to the answer about MOE, their is a axiom in Hollywood, that all publicity good or bad, is good.

Stephen said...

FOFOA, allow me to provide an alternative scenario of the events of HK in 1997. The years leading up to the takeover of the colony, forced major decisions among the Trading "HONG" Houses ( mini- conglomerates) These Taipan`s were refugees into the colony after the LONG MARCH. And in spite of assurances that HK would remain as one China, two systems, the Taipan`s were afraid of retribution / confiscation of their assets. IMHO those massive purchases of paper gold was by the Hongs as a fail-safe to protect much their wealth, they could exit Hong Kong with much of their wealth preserved in their briefcases. It is a fact that the PRC did not have the financial sophistication as the Taipan`s nor the apparatus in the Bank of China to execute those purchases as a government. Oil was not a concern for the PRC, however the acquisition of hard foreign currency (dollars) was the prime concern, as no one want chinese rennembi in those days. The rest is history. The PRC kept their promise, did not confiscate, and the power blocks of HK kissed and made up old family ties, and slowly facilitated the sophistication of the Bank of China into the International arena.

mortymer said...
This comment has been removed by the author.
mortymer said...

...is this post closed?

Would add here:


war ended 1991 while the transfer took some time ending 1997

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