The geopolitics of gold

Western central banks have got themselves horribly wrong-footed as a result of not adjusting their anti-gold policies to allow for the realities of Asian gold demand. Though their dealings are shrouded in secrecy, there is compelling evidence that much – if not most – of Western central bank gold has been quietly sold over the last three decades.

More recently all members of the Shanghai Cooperation Organisation, a common security and trading bloc led by Russia and China and incorporating the bulk of Asia’s land mass, have been accumulating gold. Between current SCO and future members (India, Iran, Afghanistan, Mongolia, Belarus and Sri Lanka), with their citizens numbering over 3 billion people, they have together cornered the global market for physical supply, without even taking account of demand from the rest of South East Asia’s gold-hungry population.

The result is that gold markets are now failing to clear. The outcome is a choice: the West will either have to stop intervening and allow gold to find a level where physical and derivative markets interact properly with each other, or capital markets in the West will face a growing crisis likely to spill over into other markets. While these outcomes were always going to be a choice to be made at some time in the future, the disconnection between physical gold and derivatives has become so great that it is now an immediate concern.

At the government level it is a geopolitical clash of the titans. Russia and China are almost certainly aware of the lack of gold in Western central bank vaults: they are fully capable of thorough due-diligence in this respect. They have so far been careful not to disrupt capital markets because it has not been in their interests to do so; however, the current hiatus in gold markets is almost certain to modify their view.

Fundamental to all this is their attitude to Western currencies: the yen is now collapsing, the euro area is in deep trouble and the US economy is at very best stagnating. Until now, payment for Russian energy and Chinese goods in foreign currencies has been welcomed, because it has allowed the Russian and Chinese elites and middle classes to accumulate wealth. This balance of interests can only be maintained for so long as Russian and Chinese governments and their citizens can hedge foreign currency risks through an offsetting accumulation of foreign-owned gold.

This is no longer the case, because to all intents and purposes western capital markets are cleaned out of physical supplies, and the ability of the Western central banks to supress gold prices appears to be ending. And with the West’s financial system no longer able to deliver their most prized commodity, hitherto passive attitudes in Asia to Western currencies are likely to be reassessed.

The gold question has become central to east-west trade. The sensible approach for Western central banks is to defuse the problems arising by taking positive steps to ensure that gold markets operate properly. This is conceptually difficult, because the most likely result, a higher gold price, would risk undermining confidence in the major currencies and most probably damage the bullion banks in London.

Despite these difficulties, realities have to be faced.

This article was previously published at GoldMoney.com.

7 Comments

  • George Thompson says:

    “The sensible approach”? Mr. Macleod, you be dreaming. At least here in the States ‘the sensible approach’ will never be attempted as long as Uncle Ben continues dropping money bombs from his attack helicopter, or there is an alternate ‘politically correct’ approach, by which is meant it will fool a sufficient number of those bothering to vote next election time. Since ‘intervention’ is what our pointy headed politicians do (pointy heads have limited cranial capacity), if the rest of the West follows their lead, your worst nightmare will be fulfilled. These lizards of smart would rather appear to be doing anything as long as they can sound bite it repeatedly during their next ‘reelect me’ campaign than to be accused of doing nothing. They can always resort to the but-I-had-good-intentions, I-did-it-for-the-children or that old fan favorite ‘It’s-all-Bush’s-fault’ defenses, and just enough voters will buy it. Detlev Schlichter is not quite right when he points out that “the debasement of paper money continues” as not just foldables, but everything of value will be debased, with the possible exception of good whisk(e)y. He is almost right that “this will end badly” since he overlooks those of us who can induce a drunken stupor.

  • Paul Marks says:

    Demand physical gold.

    Those who have sold vast amounts of gold in recent times (in an effort to crash the price of gold) must be asked to produce the physical gold they have supposedly sold – the physical gold they claim to have should be demanded from them.

    And if they can not produce the physical gold – then action for fraud should be taken against them.

    No point in expecting the state to undertake this legal action. Both civil and criminal (private prosecution) will have to be undertaken by private indivudals and organisations (at their own expense).

    Even if the state steps in to stop legal proceedings, it will be worth making the point. To expose the financial (and political) order for the corrupt sham that it is.

  • Michael Swaby says:

    Here’s a small anecdote regarding a disconnect between physical gold and derivatives. About two weeks after the April gold crash I checked my favourite local sovereign providers, in the hope that prices might have eased. Unsurprisingly, they had not.
    However, what was possibly surprising was that not only had the quantity on offer apparently decreased but that, if anything, prices had actually gone up.

  • Paul Marks says:

    Yes Mr Swaby – everyone knows what has happened has been a massive fraud (if it was not – then the price of those coins you wanted to buy would have down, and the quanity would not have been suddenly restricted…), but it seems impossible to punish anyone for the fraud.

    This undermines faith in both the markets and in the legal system.

  • Michael Swaby says:

    Thank you Paul, I agree. Has the grapevine yet revealed the identity of last month’s big seller?

  • Paul Marks says:

    I do not know Mr Swaby – but they would not have acted without at least a nod and a wink for the Federal Reserve (and the rest of the financial “international community”) that is how things are done these days.

    By God I long to see the day when this farce comes to an end.

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