Chinese Checkmate
By Bill Holter
September 22nd, 2014
I had planned to write a piece entitled “Gold and Silver Can Never Go Up” but will defer that until tomorrow. Don’t worry, it’s not what you are thinking I assure you. Instead, I will expand on my “Kill Switch” theory a bit and for a lack of better term call it “checkmate!”
Before getting into this I want you to understand the relationship between the U.S. and China… from China’s point of view. They view us as an adversary, they always have and always will. Sure they will smile and do business with us but to what end? The answer of course is “theirs.” I have posited in the past that China has been absolutely brilliant in playing our “debt game” over the last 10-15+ years. They used the American consumer as end sales for their production of goods. This created cash flow and allowed them to build out their production and manufacturing base at a rate much faster than any civilization in history.
They also built “ghost cities” and all of the infrastructure that goes with it. Had they not played the “debt game” this could never have been done. Remember, earlier this year China made crystal clear their stance on derivatives. They announced that should they choose, they will default on any derivative at their prerogative… because they know. They know the derivatives game is a naked sham and “product” does not for the most part exist behind many contracts. I believed and now believe more strongly than ever, China played the game knowing full well the debt would collapse. They also created new infrastructure and manufacturing capacity while ours is old and in decay. They looked 100+ years into the future while we were still looking at the past.
That said, I believe China has set up via incredible chess management a trap that even the best fictional writers would envy. First, they have purchased and amassed well over $3 trillion worth of U.S. dollar reserves and Treasury securities. This position alone makes them our largest banker and puts them in a position of power over us. It has been speculated the Chinese could just start dumping Treasuries and dollars to short circuit our financial system and thus the economy. I don’t think so …all by itself. Yes this would probably put a serious wrench in our system but what if it didn’t completely do the job? What if the Fed stepped up (they will) and magically bought everything China sold? The Fed has already quadrupled their balance sheet in 6 years, what would another doubling be? What would stop the Fed from simply bidding for anything and everything being sold? They’ve pretty much already done this with the various “QE’s” so what is another $3 trillion or so? My point is this, it could be done by the Fed and China knows this.
China has also accumulated an absolute minimum of 6,000 tons of gold since 2008 and more than likely have 10,000+ tons which would make them the largest holder in the world even if our 8,133 tons exists…which it does not. This speculation does not even include “legacy gold” which was mined and accumulated over 100's if not several thousand years. Their total very well could be in the 15-20,000 ton range but let’s assume they only have 6,000 tons. This amount makes them number one in the world no matter what the Fed, the Treasury or the Wizard of Oz has to say.
Next is the silver side of it. I have told you my theory on why open interest would rise as the price fell. Some are saying that each time the open interest rose the price then followed and got killed. This is true but “it’s different this time.” I know “scary words” but it really is different this time because in the past, open interest rose …along with price…and sentiment …into what we’ll call “peaking action.” Now, open interest has steadily risen while price and sentiment were ground into the dirt, there is no “froth” whatsoever. In fact, a better description would be “despair.” So it really is different and the longs must also be very different entities because they have stood tall and increased their positions while taking billions of $ in losses, who could or would do this?
The answer of course are the Chinese. They “could” withstand major losses because they have the money to do so. They also look very very long term down the road and couldn’t care less if some margin clerk hits them over the head with daily calls, they just fund them and know the Sun will rise tomorrow. The situation in COMEX silver has gotten very lopsided as the open interest for Dec. silver is a staggering 700 million ounces while the registered inventory is only 60 million. Obviously this is a very big potential problem.
The Chinese also just opened their physical exchange Friday only to see gold hit for another few dollars and silver attacked for .50 cents. The gold community is scared witless because the usual suspects have all turned up as traders on the Shanghai exchange. I would like to point out that the Chinese do not put up with “fraud” very well. In fact, they just executed a billionaire 2 months or so back because he was involved in fraud. How many Americans other than Stanford and Madoff got jail time not to mention being executed over the fraud involved leading up to 2007 and ’08? None. Nobody. Can you say “Jon Corzine?”
Also of note is the inventory of silver now held in Shanghai. What was nearly 1,200 tons a year ago is now a measly 92 tons. This for round numbers works out to only $50 million. $50 million? I know several individuals personally who could write a check of this amount. Unless we see metal entering their vault very shortly an arbitrage is going to begin in earnest. Maybe I should just call it a transfer but what will happen logically is a search at other vaults will begin. The LBMA, COMEX, and SLV are obviously the most visible and logical places. If demand from Shanghai, Singapore, Hong Kong or even Dubai cleans out THEIR inventories then “no worries,” it can be sourced at these locations…or can it? And if it can, for how long?
As I started out with, China maybe could put some pretty serious hurt on us by dumping Treasuries but as in the “Art of War” by Sun Tzu, they will not go off halfcocked and everything must be fully planned down to the minute details. Putting this all together I believe China has engineered a masterpiece. They are our banker and we owe them trillions of $. China has built out their manufacturing base and productive capacity unlike any civilization ever. They have accumulated massive amounts of gold which could have ONLY come from Western vaults …so “their imports” were “our depletion” and came at our expense. I believe they also have their finger on the trigger of the silver market by cornering the December contract which will now be followed by their own “pricing mechanism” of a physical exchange. What will be the “real price” of silver if a physical exchange runs out of silver? I believe COMEX will ultimately be embarrassed by non-delivery and the exposure of massive fraud, this will be just one of the punishments China sends West.
While I’m at it I might as well add a “cherry on top” for appearance sakes. What just happened this past Friday? Well, Alibaba of course. Alibaba raised nearly $22 billion in capital which valued the entire company at $168 billion. It has since risen in value to that equal to Walmart …only a handful of U.S. companies are larger. Is Alibaba really worth this much? No matter opinion, the Chinese “sold” at what they believed to be a good price and sucked up $22 billion worth of capital in the process.
You can say what you want, say “it’ll never happen” or whatever. The chess pieces are on the table and our “opponent” is not in this for bragging rights or loose change, they are in it for all the marbles! China is our biggest banker and supplier of capital, our biggest supplier of consumer goods, they have been the biggest hoarder of gold and I hypothesize the “mystery owner” of huge positions in Dec. silver. Every move they have publicly made for over 2 years has been dollar negative and yuan/trade positive. They have built cities, infrastructure, plant and equipment which is clearly beyond current needs for capacity. China has done deals with our friends and foes alike, they have supported geopolitically nearly anything and everything contrary to public U.S. views and policy. They are supporting Mr. Putin financially while the U.S. tries in vain to punish him financially. Would, could, the U.S. place “sanctions” on China for breaking the “sanctions” on Russia? I know, that was a bad joke but it’s a real question.
Before finishing let’s not forget about the “cherry on top,” did China just dump the largest IPO in U.S. history at the top of the market? A market, financial system and economy that I believe they are now in a position to destroy at the flip of a switch and the timing of their desire? Like I said, laugh at this, laugh at me, do whatever you’d like, all I am doing is pointing out the very obvious. No country or nation should or would ever put their adversary in a position to destroy them, we have allowed it and even encouraged it. We are broke, we depend on our adversary for funding, trade, and we have given them all of our real money, what’s next? Trading them Manhattan for a few trinkets? The danger to their plan in my opinion is this, just as it is dangerous to corner a wild animal it is more dangerous to bankrupt and financially corner a nuclear power.
http://blog.milesfranklin.com/chinese-checkmate
By Bill Holter
September 22nd, 2014
I had planned to write a piece entitled “Gold and Silver Can Never Go Up” but will defer that until tomorrow. Don’t worry, it’s not what you are thinking I assure you. Instead, I will expand on my “Kill Switch” theory a bit and for a lack of better term call it “checkmate!”
Before getting into this I want you to understand the relationship between the U.S. and China… from China’s point of view. They view us as an adversary, they always have and always will. Sure they will smile and do business with us but to what end? The answer of course is “theirs.” I have posited in the past that China has been absolutely brilliant in playing our “debt game” over the last 10-15+ years. They used the American consumer as end sales for their production of goods. This created cash flow and allowed them to build out their production and manufacturing base at a rate much faster than any civilization in history.
They also built “ghost cities” and all of the infrastructure that goes with it. Had they not played the “debt game” this could never have been done. Remember, earlier this year China made crystal clear their stance on derivatives. They announced that should they choose, they will default on any derivative at their prerogative… because they know. They know the derivatives game is a naked sham and “product” does not for the most part exist behind many contracts. I believed and now believe more strongly than ever, China played the game knowing full well the debt would collapse. They also created new infrastructure and manufacturing capacity while ours is old and in decay. They looked 100+ years into the future while we were still looking at the past.
That said, I believe China has set up via incredible chess management a trap that even the best fictional writers would envy. First, they have purchased and amassed well over $3 trillion worth of U.S. dollar reserves and Treasury securities. This position alone makes them our largest banker and puts them in a position of power over us. It has been speculated the Chinese could just start dumping Treasuries and dollars to short circuit our financial system and thus the economy. I don’t think so …all by itself. Yes this would probably put a serious wrench in our system but what if it didn’t completely do the job? What if the Fed stepped up (they will) and magically bought everything China sold? The Fed has already quadrupled their balance sheet in 6 years, what would another doubling be? What would stop the Fed from simply bidding for anything and everything being sold? They’ve pretty much already done this with the various “QE’s” so what is another $3 trillion or so? My point is this, it could be done by the Fed and China knows this.
China has also accumulated an absolute minimum of 6,000 tons of gold since 2008 and more than likely have 10,000+ tons which would make them the largest holder in the world even if our 8,133 tons exists…which it does not. This speculation does not even include “legacy gold” which was mined and accumulated over 100's if not several thousand years. Their total very well could be in the 15-20,000 ton range but let’s assume they only have 6,000 tons. This amount makes them number one in the world no matter what the Fed, the Treasury or the Wizard of Oz has to say.
Next is the silver side of it. I have told you my theory on why open interest would rise as the price fell. Some are saying that each time the open interest rose the price then followed and got killed. This is true but “it’s different this time.” I know “scary words” but it really is different this time because in the past, open interest rose …along with price…and sentiment …into what we’ll call “peaking action.” Now, open interest has steadily risen while price and sentiment were ground into the dirt, there is no “froth” whatsoever. In fact, a better description would be “despair.” So it really is different and the longs must also be very different entities because they have stood tall and increased their positions while taking billions of $ in losses, who could or would do this?
The answer of course are the Chinese. They “could” withstand major losses because they have the money to do so. They also look very very long term down the road and couldn’t care less if some margin clerk hits them over the head with daily calls, they just fund them and know the Sun will rise tomorrow. The situation in COMEX silver has gotten very lopsided as the open interest for Dec. silver is a staggering 700 million ounces while the registered inventory is only 60 million. Obviously this is a very big potential problem.
The Chinese also just opened their physical exchange Friday only to see gold hit for another few dollars and silver attacked for .50 cents. The gold community is scared witless because the usual suspects have all turned up as traders on the Shanghai exchange. I would like to point out that the Chinese do not put up with “fraud” very well. In fact, they just executed a billionaire 2 months or so back because he was involved in fraud. How many Americans other than Stanford and Madoff got jail time not to mention being executed over the fraud involved leading up to 2007 and ’08? None. Nobody. Can you say “Jon Corzine?”
Also of note is the inventory of silver now held in Shanghai. What was nearly 1,200 tons a year ago is now a measly 92 tons. This for round numbers works out to only $50 million. $50 million? I know several individuals personally who could write a check of this amount. Unless we see metal entering their vault very shortly an arbitrage is going to begin in earnest. Maybe I should just call it a transfer but what will happen logically is a search at other vaults will begin. The LBMA, COMEX, and SLV are obviously the most visible and logical places. If demand from Shanghai, Singapore, Hong Kong or even Dubai cleans out THEIR inventories then “no worries,” it can be sourced at these locations…or can it? And if it can, for how long?
As I started out with, China maybe could put some pretty serious hurt on us by dumping Treasuries but as in the “Art of War” by Sun Tzu, they will not go off halfcocked and everything must be fully planned down to the minute details. Putting this all together I believe China has engineered a masterpiece. They are our banker and we owe them trillions of $. China has built out their manufacturing base and productive capacity unlike any civilization ever. They have accumulated massive amounts of gold which could have ONLY come from Western vaults …so “their imports” were “our depletion” and came at our expense. I believe they also have their finger on the trigger of the silver market by cornering the December contract which will now be followed by their own “pricing mechanism” of a physical exchange. What will be the “real price” of silver if a physical exchange runs out of silver? I believe COMEX will ultimately be embarrassed by non-delivery and the exposure of massive fraud, this will be just one of the punishments China sends West.
While I’m at it I might as well add a “cherry on top” for appearance sakes. What just happened this past Friday? Well, Alibaba of course. Alibaba raised nearly $22 billion in capital which valued the entire company at $168 billion. It has since risen in value to that equal to Walmart …only a handful of U.S. companies are larger. Is Alibaba really worth this much? No matter opinion, the Chinese “sold” at what they believed to be a good price and sucked up $22 billion worth of capital in the process.
You can say what you want, say “it’ll never happen” or whatever. The chess pieces are on the table and our “opponent” is not in this for bragging rights or loose change, they are in it for all the marbles! China is our biggest banker and supplier of capital, our biggest supplier of consumer goods, they have been the biggest hoarder of gold and I hypothesize the “mystery owner” of huge positions in Dec. silver. Every move they have publicly made for over 2 years has been dollar negative and yuan/trade positive. They have built cities, infrastructure, plant and equipment which is clearly beyond current needs for capacity. China has done deals with our friends and foes alike, they have supported geopolitically nearly anything and everything contrary to public U.S. views and policy. They are supporting Mr. Putin financially while the U.S. tries in vain to punish him financially. Would, could, the U.S. place “sanctions” on China for breaking the “sanctions” on Russia? I know, that was a bad joke but it’s a real question.
Before finishing let’s not forget about the “cherry on top,” did China just dump the largest IPO in U.S. history at the top of the market? A market, financial system and economy that I believe they are now in a position to destroy at the flip of a switch and the timing of their desire? Like I said, laugh at this, laugh at me, do whatever you’d like, all I am doing is pointing out the very obvious. No country or nation should or would ever put their adversary in a position to destroy them, we have allowed it and even encouraged it. We are broke, we depend on our adversary for funding, trade, and we have given them all of our real money, what’s next? Trading them Manhattan for a few trinkets? The danger to their plan in my opinion is this, just as it is dangerous to corner a wild animal it is more dangerous to bankrupt and financially corner a nuclear power.
http://blog.milesfranklin.com/chinese-checkmate
