Economics

China and gold

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.

This article was previously published at GoldMoney.com.

5 comments to China and gold

  • chuck martel

    Obviously, by embracing the “barbaric relic”, the Asians are demonstrating that they’re just not as intelligent as western central bankers, who might accept the demise of the dollar, knowing that they’ll still be able to enpixelate some fiat replacement.

    • I always found Keynes oft quoted ‘(gold is a)Barbaric relic of the past’ interesting. The entire economic system named after him is, simply put – slavery.

      Now if that isn’t the greatest barbaric relic of the past, what is? Yet not a mention of it in the mainstream.
      As Cole Porter sang:-
      The Worlds mad today
      Goods bad today
      Blacks white today
      Days night today…

      And this was 15 years before Orwell mentioned doublespeak.

  • Paul Marks Paul Marks

    Interesting.

  • Craig Howard

    It is interesting and it will be even more interesting to see what China’s intentions are for this gold. Will it be used to back the Yuan?

    Or is it just a case of the old mercantilist fallacy that wealth consists in gold and not in what it can buy?

  • Paul Marks Paul Marks

    Craig Howard.

    I do not know what the Chinese government thinks or what they will do.

    However, I do know what many Chinese people think.

    Like Indian people (and others) they understand that THE GOLD IS THE MONEY.

    It is not a question of it “backing” anything – THE GOLD IS THE MONEY.

    Yes wealth is really what the money can buy (not the money itself).

    But that does not alter the fact that, in the end, it is the gold that is the money.

    I think we agree on all the above.