China’s recently renewed liquidity injections are currently the more immediate driver for gold than the West’s longer-term fiscal debasement risks. This argues for favouring gold and precious metals near term, while waiting for clearer evidence that Global Liquidity has turned before increasing Bitcoin exposure. We update last week’s argument in this report.
China must debase the value of the Yuan domestically in order to tackle her huge internal debt problems. Read this as a reaction to her historic debts. The West (i.e. the US and Europe) will have to debase the value of their currencies to manage their future debt problems caused by runaway fiscal spending, poor productivity and ageing demographics. China’s problem is now, and already reflected in the trending gold price: the West’s problem lies ahead and although popularly characterized as the ‘Great Debasement’ and inevitable, it has yet to occur.
In short, gold investors need to closely watch Chinese policy actions. We noted last week that the People’s Bank has restarted liquidity injections after a short and seemingly mysterious lull from early March. This we figured would be bullish for gold. Consider the chart below which highlights the close co-movement between the PBoC balance sheet and the gold bullion price. China’s Shanghai Gold Exchange is the marginal price setter, eclipsing London and COMEX.
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