China, Gold, and the Civilization Shift

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Stephen Jen
from the hedge fund Blue Gold Capital has a warning for those who
think that gold has risen far too high, is necessarily in a speculative
bubble, and must soon come clattering back down.

Mr Jen is an
expert on sovereign wealth funds from his days at Morgan Stanley.
The gold story – essentially – is that the rising economic
powers of Asia, the Middle East, and the commodity bloc are rejecting
Western fiat currencies. China, India, and Russia have all been
buying gold on a large scale over recent months.

Why should
that stop when the AAA club of sovereign debtors is pushing towards
the danger threshold of 100pc of GDP?

These new players
account for almost all the accumulation of foreign currency reserves
worldwide over the last five years, so what they do matters enormously.

After crunching
the numbers, Mr Jen found that the share of gold in their reserves
is just 2.2pc compared to 38pc for the Old World (perhaps we should
just call them the deadbeats from now on). They would have to buy
$115bn of gold at current prices to raise their bullion to just
5pc of total reserves, and $700bn to reach just half western levels.

The killer-term
here is at current prices since any such move in the tiny global
market for gold would send prices into the stratosphere.

Mr Jen says
that you know where you are in the currency markets – more
or less – because there are concepts of “fair value”
used by experts. Ditto for the equity markets, where you have P/E
ratios (warts and all I might add, since the actual reported P/E
of the S&P 500 was a record 141 in September before the agency
stopped publishing the figure – a far cry from the forward
earnings in vogue).

How on earth
do we determine what fair value should be for gold? “We have
no such concept,” he said. Actually, that is not quite true.
You can use the dollar monetary base as a proxy.

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the rest of the article

November
30, 2009

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