And I talk about that in Chapter 9 and Chapter 11 in my book, how they’re using the People’s Liberation Army to smuggle gold into China overland, without going through Hong Kong. So they’re getting all the gold they can and so are others. But there’s been a lot of speculation as to why is China getting all this gold.
Well, they must want a new reserve currency backed by gold. It may end up there, but that’s not what they’re doing in the short run. Here’s the way to think about it. They own $4 trillion of reserves today, mostly in paper assets. Most of that is US dollar denominated and most of that are US Treasury notes. So they’re the biggest creditor of the United States of America.
They actually don’t want to gold to skyrocket. What they want is a strong dollar. Nobody wants a stronger dollar more than China because China owns more dollar securities than anyone else in the world. But they’re worried. They’re fearful that we will inflate the dollar and if you do a 10% inflation of the dollar, you reduce the dollar’s value by 10%.
That’s like a $300 billion wealth transfer from China to the US because their assets are worth less, our liabilities go down, so we’re stealing wealth from China and they know it. Now they can’t dump these treasury securities. There are too many of them. But what they can do is buy gold and here’s how it works.
If we have a stable dollar maybe the gold doesn’t go up that much, but they’ll be very happy with that because their securities will be worth what they think they are. But if we inflate the dollar which we’re trying to do, they’re going to lose money on the paper, but they’re going to make it on the gold.
Because we all know that if inflations comes along gold is going to go up very, very significantly. So in effect they’re creating a hedge position. They’ve got paper over there, gold over here. They would like the paper to be valuable, but if the paper drops in value, the gold is going to go up. So they’re actually building a hedge book.