China and gold

The Cobden Centre ^ | 10/21/13 | Alasdair Macleod

[BfloGuy]

China is now overtly pushing for the US dollar to be replaced as the world’s reserve currency.

Xinhua, China’s official press agency on Sunday ran an op-ed article which kicked off as follows:

As U.S. politicians of both political parties are still shuffling back and forth between the White House and the Capitol Hill without striking a viable deal to bring normality to the body politic they brag about, it is perhaps a good time for the befuddled world to start considering building a de-Americanized world.

China does have a broad strategy to prepare for this event. She is encouraging the creation of an international market in her own currency through the twin centres of Hong Kong and London, side-lining New York, and she is actively promoting through the Shanghai Cooperation Organisation (SCO) non-dollar trade settlement across the whole of Asia. She has also been covertly building her gold reserves while overtly encouraging her citizens to accumulate gold as well.

There can be little doubt from these actions that China is preparing herself for the demise of the dollar, at least as the world’s reserve currency. Central to insuring herself and her citizens against this outcome is gold. China has invested heavily in domestic mine production and is now the largest producer at an estimated 440 tonnes annually, and she is also looking to buy up gold mines elsewhere. Little or none of the domestically mined gold is seen in the market, so it is a reasonable assumption the Government is quietly accumulating all her own production without it becoming publicly available.

Recorded demand for gold from China’s private sector has escalated to the point where their demand now accounts for significantly more than the rest of the world’s mine production. The Shanghai Gold Exchange is the mainland monopoly for physical delivery, and Hong Kong acts as a separate interacting hub. Between them in the first eight months of 2013 they have delivered 1,730 tonnes into private hands, or an annualised rate of 2,600 tonnes.

The world ex-China mines an estimated 2,260 tonnes, leaving a supply deficit for not only the rest of gold-hungry South-east Asia and India, but the rest of the world as well. It is this fact that gives meat to the suspicion that Western central bank monetary gold is being supplied keep the price down, because ETF sales and diminishing supplies of non-Asian scrap have been wholly insufficient to satisfy this surge in demand.

So why is the Chinese Government so keen on gold? The answer most likely involves geo-politics. And here it is worth noting that through the SCO, China and Russia with the support of most of the countries in between them are building an economic bloc with a common feature: gold. It is noticeable that while the West’s financial system has been bad-mouthing gold, all the members of the SCO, including most of its prospective members, have been accumulating it. The result is a strong vein of gold throughout Asia while the West has left itself dangerously exposed.

The West selling its stocks of gold has become the biggest strategic gamble in financial history. We are committing ourselves entirely to fiat currencies, which our central banks are now having to issue in accelerating quantities. In the process China and Russia have been handed ultimate economic power on a plate.

[BfloGuy]

As of January 2013 The Federal Reserve had deposits of 8.133 thousand tons of physical gold. This is about the equivalent of Germany Italy and France, the next three largest holders of gold, put together. China had about 1000 tons.

Ah, but is that 8,133 tons really there? And how many of those tons are deposits being held for foreign entities? That's not meant as a trick question; I'd just like to know.

[BfloGuy]

The dollar is backed by oil.

The dollar is backed by nothing. Unless and until you can march into your bank and exchange dollars for a predefined quantity of oil, it is not backed by oil.

What you are saying [I think] is that increased oil drilling in the U.S. will help keep its value high on foreign-exchange markets. Likely true, but it is a mistake to call that backing and it does nothing to prevent the Fed from further cheapening those dollars by creating more of them.

Up until 1933, the dollar truly was backed by gold at a defined weight set by Congress as is the Constitutional requirement. Any holder of dollars could exchange them at the teller's window for their equivalent in gold.

If confidence in the dollar was low, more people would exchange them for gold, drawing down the gold reserves and forcing the banks to tighten credit thus relieving inflationary pressure.

That is the only definition of backing a currency.