by Michael McKay
Below are some interesting comments by Richard Russell, made yesterday, re Gold and China.
His contention is that China, by aggressively accumulating Gold, is vying to become the next World Reserve Currency.
China is a major player and the fact that they can (and in my opinion probably will) confiscate all of their “citizens” gold when it suits them may give them enough Gold to pull it off.
Russell backs up his view with this insight: “He who owns the Gold makes the Rules”.
To that I would amend, “He who can demand Gold and prices commerce in Gold will make ALL the Rules”
This is worth thinking about.
I refer you to my writing “The Race To Destroy Fiat Money Will Cause Gold to Win” (here) in which I present that it may not necessarily be a single Nation, like China, that may establish the next primary money used in world trade.
Instead, I believe that a “Trans-National”
(or especially an “Extra-National”) consortium of interests could cause Gold to become the all important International “Unit of Account” and “Unit of Settlement”.
I also believe that the most credible entity that ties their Money to Gold could dominate markets for many years to come.
The problem with China is that Its totalitarian model which momentarily chooses to allow capitalism and pretends to allow property rights can never have “good enough” credibility.
Therefore, as more and more States discredit themselves we see a genuine opportunity for Extra-National groups to establish the most important currency in the world – credibility.
Note that this complements the scholarship that forecasts the Demise of the Nation State which we have explored on this RadioFreeMarket.com World Report interview with Andy Duncan and Roman Skaskiw.
(p.s. watch for new RadioFreeMarket.com interviews on this topic coming soon).
I welcome comments and criticisms of my presentation.
Comments by Richard Russell
April 2, 2012 – China has been denigrated and looked down upon for decades — by Russia, Japan, the US and much of the world. It’s strange but true, but China possesses the greatest monetary reserves of any nation in the world. China is loaded with over a trillion dollars worth of US Treasuries plus hundreds of billions of US bonds and T-bills. The problem for China is that the great majority of its reserves are in other countries’ fiat money. What to do, asks China, with all this fiat “junk money” that weekly is losing purchasing power?
China realizes that the longer it sits with its huge pile of fiat paper, the more it loses in purchasing power, and this will continue as long as the various central banks continue to spew out fiat currency –and at present there’s nothing to suggest that the banks will do otherwise
So China has decided to do the logical thing. It will kill two birds with one stone. China has decided to swap its hoard of fiat paper for gold. China is now the world’s leading miner of gold, and it is also the leading buyer of gold. China has decided to create a corner in gold; it will create the world’s greatest position in gold.
Whenever there is a big quantity of gold to be sold by a central bank or the IMF, China is there as a buyer. I’ve mentioned that there appears to be a “Chinese put” under gold. Every time gold approaches 1600 or slightly below, some big buyer steps in and buys gold. Who is that big buyer? I’ve wondered. The secret — it’s China.
This month, the Hong Kong Census and Statistics Dept. reported that China imported 102,7789 kilograms of gold from Hong Kong in November, an increase over October’s 86,299 kilos. For unknown reasons Beijing does not release its gold trading figures.
Analysts believe that China bought as much as 490 tons of gold in 201, almost double the estimated amount in 2010.
In effect, China with its towering mountain of fiat paper wants to build a corner on gold. And they are in a position to do it. China has urged its people to buy gold. Gold can come into China but not one ounce of gold is allowed to leave China. Every ounce of gold that is mined in China must, by law, be sold to the government of China.
Finally, when China owns more gold than any other nation, China will set the price of gold. China will also back its own yuan with gold. But at what price gold? China will set the price for gold, moving the daily fix price from London to Beijing.
Thus, as the gold-backed yuan becomes more popular and more accepted, the “new” gold-backed yuan will gradually become the new world reserve currency. When this happens, it will be a disaster for the US. The dollar will lose its status as the world’s reserve currency, and the US will no longer be able to print its own reserve money that is accepted around the world as payment for US debts.
If the Fed sees this picture, they will have no answer but to stop printing. If or when that happens, the bear market that started in 2007 will continue and stocks and bonds will collapse as interest rates rise.
Thus gold, so violently hated by the central banks, will be the item that will kill the great world fiat paper experiment. And China, with a virtual corner on the gold market, will own the world’s reserve currency.
Note: I expect China to not only accumulate gold above the ground, I expect China to accumulate gold in the ground. Thus we have seen China buy gold mines and parts of gold mines. China is also interested in investing in vast territories (which contain gold) in Africa. Over time, China intends to control the gold market and the price of gold. Only then will China emerge as the recognized world leader.
The “golden rule.” He who owns the gold makes the rules. Go through history and you’ll note that the nation which owns the most gold is the dominant nation in the world, be it Holland, Spain, Britain or the US. By the end of WWII, the US owned the world’s greatest hoard of gold. When deGaulle of France insisted that the US pay its debts in gold, Nixon slammed the gold window.
Question — if gold is the barbaric relic that the Fed claims, why did the US refuse to give up any more of its gold in 1970? Also, with its current great collection of gold, why does the US insist that its gold is only worth 44.20 an ounce?
From Google — “Central banks are quietly accumulating gold, declared purchases of 206 tons through September 2011.”
“One of the most important sources of demand continues to be central bank demand.”
Russell comment — I think within the next two or three years, it will be impossible to buy gold, except at black market prices.