Tuesday, March 9, 2010

Watch What China Does and Not What It Says

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

The Chinese have recently released statements indicating that they are not interested in buying gold and that they plan on remaining "responsible investors" in U.S. treasuries. China is not known for informing the market about what it is actually doing. It instead has a long history of keeping its actions carefully hidden. It would therefore be reasonable for investors to assume that China is buying gold and selling U.S. treasuries.

The case for China doing the opposite of what its official statements indicate goes well beyond mere assumption. When TIC (Treasury International Capital) data was released in November and December, the numbers indicated that China was a net seller of U.S. treasuries. This potentially explosive news got little mainstream media coverage. China also announced in April 2009, that its gold holdings were 76% higher than had been previously reported earlier in the decade. China didn't mention it was buying this extra gold while it was doing so. Don't expect it to announce its gold purchases in the future either.

In its announcement, the director of China's State Administration of Foreign Exchange stated that China is not interested in buying more gold because of its poor returns in the last 30 years. He didn't mention its excellent returns in the last 10 years or even over the last 40 years. A similar argument could have been made to not buy U.S. stocks in 1982 because of their abysmal returns in the previous 16 years. You would have missed out on an 1100% rally in the Dow. This type of argument is meant for the financially naive and unsophisticated.

The director went on to state that China did not want to politicize its trading in U.S. debt and wanted to remain a "responsible investor". It is not clear what charges he was responding to, nor who had made them. There have been attempts to explain away the TIC statistics from November and December by claiming that China was secretly buying U.S. treasuries indirectly through intermediaries in the UK and Hong Kong.  Since this would make China look like it was selling treasuries and potentially devalue its vast treasury hoard, this behavior would make no sense. Furthermore, if you accept that treasury purchases are being funneled clandestinely through intermediaries, it would be far more plausible to assert that the U.S. Federal Reserve has been buying treasuries through Caribbean island off-shore money havens as some bloggers have suggested. The Fed would have good reason to do this in order to hide the extent of its money printing activities.

Investors need to keep the simple rule of 'watch what they do and not what they say' in mind when interpreting the news. Talk is cheap and most governments will say whatever they have to in order to implement their plans.  The mainstream media dutifully reports whatever is said. Unfortunately, they are not very diligent in reporting on what is actually done. That is really the only news that matters and sometimes the only place you can find it is in the blogosphere.

Disclosure: None

NEXT: NovaGold, the Gold Market and the Euro

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

1 comment:

Spodeworld said...

Very good post Daryl. It's an eye opener in light of what was reported about China and gold.