China appears to be bent on becoming a dominant force in the physical gold market. There are eight refineries in mainland China converting 400 oz. London good delivery bars into Kilo bars, the preferred format in Asia. An increasing flow of physical is bypassing London andgoing straight to China. China has not shown its hand in the official sector. At last report (five years ago), China holds only 1000 tonnes of gold in official reserves. Current market weakness certainly benefits large buyers of physical as well as their fiscal agents in Western financial markets. China may be attempting to help their cause by understating import levels and by overstating domestic production. The CEO of a major Canadian mining company, whose research group has done due diligence on every existing producing mine of significance in the world, including China (over 2000 properties globally) believes that domestic Chinese production is less than half of what is reported officiall y. We have also heard credible stories from other mining executives to the effect that short reserve lives will mean a significant decline in future domestic production. Also uncaptured in Hong Kong import numbers are direct shipments from Russian production, which are said to be conveyed by the Chinese military. The Chinese government continues to encourage its citizens to buy physical gold, but why? Our guess is that Chinese policy makers take a different view of the future price than Western hedge funds, and we suspect they have a superior grasp of where the gold price is headed. 

In the financial markets, a person that is one step ahead of the crowd is considered a genius, but two steps ahead, a crackpot. Call us the latter, or just resolute, but we hereby go on record as downgrading the sovereign debt of all democracies to junk status. It seems to us that restoration of sustainable fiscal order remains a long shot and that money printing, thought by most to be only an emergency measure, will become the norm. Our negative view on the prospects for fiat currency has not been invalidated by the steep two year decline in gold price. When the market reverses, the diminished physical anchor to paper claims, concerns over title and encumbrances on central bank bullion, and worries over the drift of public policy will drive liquid capital into gold. However, this time around, it seems to us that the major recipient of flows will be the physical metal itself. Holders of paper claims to gold will receive polite and apologetic letters from intermediaries offering to settle in cash at prices well below the physical market. To those who wish to hold their wealth exclusively in paper assets, implicitly trusting the policy elites to resurrect normally functioning capital markets and economic conditions, we say good luck. For those who harbor doubts on such an outcome, we say get physical.

….read this full & very detailed article with charts HERE

Hat tip to Mark Leibovit’s VR Gold Letter