Gold, China and the US Dollar

Currency Upheaval and the Swiss Central Bank

editor’s note: this post is older, but contained enough good information that it’s a pretty meaningful read, so I posted it.

On January 15, 2015, Switzerland caused global market chaos. It was the biggest Gold War news in 2 years. Known losses were in excess of several hundred billion and could have been much larger underneath the covers. It was a precursor to a rollout of monetary printing and debt easement by the Euro Central Bank and therefore a pre-emptive strike by the Swiss bank. 

The peg was announced on September 6, 2011 with the goal of keeping the Franc at 1.2 to the Euro. Every time it would dip below that (meaning the Franc got more valuable) the Swiss would ‘print and sell’ – creating Swiss Francs and selling them into the market for Euros. This flood would drive the price of the Franc back down and raise the price of the Euro up. This was to keep the Swiss export situation affordable, so the world would still buy watches and chocolate. The markets took it as a guarantee and quite a few hedge funds shorted the Franc. Some went into 50 or even 100 to 1 margin. Normally, a high margin is workable in currency exchanges because the rates make small moves – they rarely jump. A 3% move in a large currency is a very big weekly move.

But when they broke the peg, the Franc jumped 40% in value in 15 minutes, then reversed to end at 19% up. To put that into perspective – if a fund sinks $2 million at 50 to 1 ratio, the fund is short $98 million. That $100 million total suddenly went to $140 million. The $2 million play lost $38 million in minutes – a 1900% loss. Most traders were stopped out – their position was closed at some point during the rise, and that’s what made the rise so fast – it was a bid only market, no one was selling. A lot of money was counting on the Swiss Banks ‘word of honor’ that they would hold the peg. When they canceled it, the markets panicked and the biggest short squeeze of the century kicked off. 

Hedge funds blew up, traders were wiped out, and brokerage houses saw the margin they fronted go up in smoke. Some of the largest banks took the biggest hits (not so big compared to their balance sheets) – Citi lost $150 million, Duetschebank about the same, and FXCM (the largest US currency broker) needed $300 million to avoid bankruptcy. To see who is an insider, JP Morgan profited by $300 million.

One of the lessons from most alternative market commenters – you cannot beat the market. Even the Central Banks cannot do it forever. The Swiss capitulation cost the central bank several hundred billion on the balance sheet. They were effectively shorting their currency and going long the Euro, so when the Franc rose, the Euro fell. 

Another lesson is the inevitability of currency wars. This is one of the major components causing China and allies to move slowly against the US dollar. As the dollar rose in early 2015 (at the time of this writing) it was causing massive problems to debt-laden sectors. Combined with the collapsing oil prices, the energy sector, especially the fracking companies, were hit terribly. Many have gone bankrupt. Meanwhile the primary indexes (S&P, etc) are staying high. This is so counterintuitive that it screams of manipulation. If the currency rises dramatically, global corporations should have a price decline because of reduced global competitiveness – their products are more expensive in other countries without a corresponding savings (lower labor costs, for example). It hasn’t happened. That’s because the ESF is holding the markets up against all pressures. How long can they do this? It’s anybody’s guess, but they are risking the viability of the US dollar the longer these many, many games go on. Loss of trust is becoming epidemic. Sovereigns are divesting of US dollars and Treasuries in mass.

Moreover, the cost of currency wars is high. The Swiss bank was bleeding red – they were putting up $100 billion per month to hold the peg at the end.

China wants to (sensibly) avoid such negative consequences. If a full depeg of the Yuan against the dollar was announced and full convertibility was allowed, the Yuan would probably rise as much or more as the Franc did. I believe the CNB will eventually depeg, but it must be very carefully orchestrated. There will be healthy interventions, which they are more than capable of with the massive dollars in reserves. These might be used to front-run the action, in essence devaluing the Yuan before allowing the market to revalue it higher. But there are many possibilities, so it is impossible to predict how it will unfold. 

The final lesson – Central Banks are no longer trustworthy. To the informed outsider, they never were. But usually, they would move these issues very slowly, announcing or hinting at changes well in advance. This kept markets stable – a key Central Bank job. But the SNB failed at that, and quite miserably. The Swiss Bank is considered quite conservative, too, so if they roiled markets to this extent, other central banks are definitely willing to do so. 

Physical gold and Miners

Gold mining costs are about $1500 per ounce, yet the price is between $1200 and $1300. How long can miners operate at a loss? Many are blowing up. Allied Nevada is a good example – it has an excellent property with great potential. But it declared bankruptcy because of a crushing debt load. The stock dropped from $40 to $0.10. All undercapitalized miners are in a similar situation – they cannot survive.

This sounds bad for the cartel – after all, it should decimate the gold supply needed to continue the suppression. However, they can simply buy the distressed properties at discount through large cap miners. Then the cartel gets the gold for an impressive discount – and they can continue to feed it to China and the other hungry nations. Clearly, China will want a big piece of the direct action. The leaders will also be buying up distressed properties, especially in contested regions like Africa, where US power is not as strong.

Gold miners will undergo consolidation from these 2 massive streams until a much higher price point is achieved. Since both sides have an interest in this consolidation, lower prices may persist for some time. It does seem that $1200 is more or less the bottom. If gold goes down to $1100, it will be brief and bounce back up. That’s mostly a market reality.

Gold is in serious backwardation below $1200 – it is almost no-offer. Who wants to sell gold at the bottom? There is clearly a limited downside risk – at most 25% and that unlikely – with enormous upside potential. Gold has already tapped at the door of $2000. When it drops below the magic $1200 mark, intense buying pressure from the market brings it back up.

All this may be somewhat immaterial by the time you buy this book. Particular price points tend to be somewhat short-term. Still, the relative analysis should hold at a different price point. It will likely be higher. Gold has been pushed (manipulated, I believe) below $1200 no less than 8 times since mid-2013. Every time, it bounced back above $1200 within weeks, and usually days. 

The supply is indeed low – despite the strong flow. For example, the COMEX has not delivered on a gold contract (at the time of this writing) since mid-2012 – almost 3 years! When the gold supply runs out, or dwindles well below Chinese (and world) demand, China will probably up the bid for gold. The gold price will then be whatever they set their bid at, and it will be at a place that calls some gold out of hiding. When that level runs dry, a new price will be set, probably much higher, because holders will see the trajectory. This, I predict, will be how the price of physical will separate from the paper price of gold. Strong miners (that aren’t owned by the banks) with high capital reserves will withhold some of their supply, waiting for higher prices. Mid-strength miners will sell gold forwards, hedging in future production at a preset price. Weaker miners will up production as much as possible and get all they can to market.

Gold Repatriation

Since the publication of Gold Wars in English, repatriation demands from the Fed’s gold depository have become a flood. The Netherlands received 122 tons of gold in late 2014. The transaction was secretive and announced, rather oddly, just prior to the Swiss referendum on repatriating Swiss gold. The Swiss referendum failed, largely due to irregularities in the vote and an incessant propaganda campaign by the Swiss Central Bank.

The Dutch had no referendum and asked for their gold out of the public eye – and got about half of their Federal Reserve gold stash back. Notably, they did not ask for any gold from their other foreign locations – Canada and London.

It occurred a few months after the Ukrainian gold reserves were confiscated by the US. After the coup in Ukraine, the US supported government there either allowed or were unable to prevent as a group of men airlifted 42 tons of Ukraine’s gold – all they had. Considering the timing, it is likely that the gold went straight to Amsterdam. No doubt, 122 tons was all the Fed could scrape together for this purpose. 

But why did the Dutch National Bank want their gold back? It seemed like a bad idea to have more than half of it in one place, they said – which amounts to a vote of low confidence in the Fed’s ability to hold it. But they also said something very interesting – bringing the gold home was meant to ‘restore public confidence in the central bank.’ Translation – central banks need gold to legitimize their activity, especially in tumultuous economic times. The DNB implied, in this rather strong move, that gold is the key to real trust and confidence.

The Fed also showed that they ‘have the gold,’ else how could they send it to the Netherlands. This move was probably calculated to allay fears of German gold being gone. Meantime, intense political pressure caused Germany to about face on its repatriation request. After getting a meager 5 tons back (of 300 called for), Germany declared its inviolable trust in the Federal Reserve and allegedly called for a halt to the gold return.

But this was a false news story on Bloomberg – one of the largest financial press networks in the US. The truth is that Germany was bringing gold home throughout 2014 – 85 tons from New York and 45 from Paris. 

Suspiciously, most of the gold was melted and recast upon arrival. Only two reasons make immediate sense – to remove the chain of custody, or to purify it. In either case, the gold returned was not the gold on deposit – else why melt it? And that means the Fed was selling it and ‘buying’ other gold back. However, since the gold was not their property, they were acting illegally. The Fed has no legal right to lease, or sell then repurchase, another country’s gold.

 Moreover, the Bundesbank failed to verify in any public audit that it had received any gold at all. Germany has over 2400 tons of gold on deposit, yet it has to go through a multi-year dog and pony show to recover a tiny percentage of that. Germany also needed to call upon the BIS for what it got, a story that makes no sense.

The nation is well capable of transporting gold home without the help of the global central bank. Likely, Germany was quietly allowed to take what the Fed could source in exchange for a public statement of confidence, essentially retracting the previous concerns. This allows for the world to hear a vote of full confidence and gives the Fed some time to cover its position.

Italy, Mexico, Poland, Australia, Ecuador, Romania, Azerbaijan, France, Belgium, Switzerland, and Austria all have repatriation movements underway to bring home gold from New York and other locations. Some have been successful, others less so. 

End of the Dollar

Dollar strength gained enormous momentum in late 2014 into 2015. This trend is difficult to predict short-term. The dollar may rise and rise to unprecedented highs, but it is doubtful. It may be decided by the time of publication of this edition of Gold Wars. The reasons for its rise are market driven, but the Fed will probably interfere if it continues.

China, Russia, and other large, antagonistic dollar holders – including Middle Eastern wealth funds – are likely exchanging their dollar holdings for physical assets in secret throughout this process. This will be collusive with the US – no party wants to initiate a market panic and cause a dollar collapse. It would damage non-US holders and damage the US currency ‘tool’ greatly diminishing its usefulness. So the sovereigns will divest with US cover.

China probably has less than 50% of the US dollar and Treasury reserves left that it claims to have. The nation has gone on a buying spree of epic proportions in almost every imaginable market – and they had to use their currency reserves to do so.

The dollar’s rise is a predictable outcome of the debt-based currency situation. When the debt load gets burdensome, dollars become more valuable – a normal process of debt deflation. It can go on for quite some time. Alongside this is the derivatives implosion. With the sharp rise in oil price, huge quantities of derivatives were triggered. Financial companies converted assets in large scale to dollars to settle these contracts. This dropped the price of those assets (often in other currencies, especially Euro and Yen) and raised the price of the dollar. This made the index appear artificially strong – but it is temporary. However, the situation can repeat many times due to the current unbalanced structure of debt and derivatives.

From another angle, the Petrodollar is breaking apart. Since 2013, China and Russia have led the way with a number of energy accords. Russia has become the world’s leader in oil production and is now selling oil essentially for gold. The nation still takes in US dollars, but now has a policy of immediate conversion to gold. Russia also has agreed to a large, long-term trade deal of oil for Renminbi or Rubles with China.

In my reckoning, the world is definitely in a state of protracted economic warfare. The China-Russia alliance – leaders of the BRICS nations – has targeted the Petrodollar on a number of fronts. Most oil exporters are not allowed to sell oil for another currency – as shown in previous chapters. The US engages in gunpoint diplomacy. But the US cannot prevent the other global powers from doing trade as they wish with each other.

This alliance is growing stronger and it is leaning heavily on the Petrodollar, waiting for it to break. It may take a few years, but China is especially patient. And Putin is very crafty. The rising powers are waiting it out while American leadership destroys its own power. Russia is steadily prying Germany away from the Western fold, using her great weapon – energy.

With Germany and Russia so close geographically, it only makes sense to create a trade deal for energy supplies. It hasn’t happened yet, but it will be a powerful blow to the Petrodollar, especially if Germany pays in Rubles, Euros, or Marks. The last is possible.

A movement was underway in Germany to depart the Eurozone (the currency union, but not the EU political union), but it fizzled out. Germany has very compelling fiscal reasons to depart the Euro and it’s ‘debt drag.’ Germany is unhappy about not being able to pursue its own currency policy and having its strong economic and fiscal situation undermined by Euro QE.

Meantime, Saudi Arabia sends more oil to China than to the US. It’s anyone’s guess how long China will tolerate the need to pay in US dollars, but it won’t be forever. When Saudi Arabia breaks from the Petrodollar, that will be its clear end. China has backed the construction of a giant Saudi refinery – a definite step towards a PetroYuan. Iran already sells oil in RMB and for gold.

Along these lines, Petrodollar ‘recycling’ went negative in 2014 – the first time in 18 years. Recycling occurs when oil exporters use the dollar proceeds to invest in financial markets. In 2014, the oil exporters drew net money out of financial markets. This is not the official end of the Petrodollar, but it breaks a powerful link in the chain – supporting the US currency complex – mostly through buying Treasuries. This was largely due to the massive drop in oil price, but the overall trend curve does not look promising for the Petrodollar.http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/11/petrodollar%20chart_0.pngAnd it’s not just the international oil market that threatens the dollar supremacy – it’s also banking. The New Development Bank is the BRICS alliance answer to the BIS. The BIS is the central bank of central banks – located in Switzerland, it sets policy for the global bank system. The NDB is funded by China and other nations in that sphere. Located in Shanghai, the bank is opening with $100 billion ($200 billion planned soon with member contributions) and the intent to insulate members from dollar volatility and the Western Cartel’s actions.

There may be a bit of desperation going on in the Western Bank cartel. Needless to say, a massive disinfo campaign is ongoing – much of the topic of this book. In July, 2014, a new tactic appeared. Instead of massaging and distorting negative information, they simply stopped reporting it. The silver lease rate is no longer offered by the Comex. Meantime, the gold lease rate went flat. There is no change from mid-Feb, 2015 to the time of this writing. Probably, it is a case of non-reporting and rehashing the last available data.Description: Lease rates

In a larger perspective, a key question is how long can the manipulation of markets continue? In the internal markets – equities like the Dow and S&P – the manipulation might last indefinitely. Unless there is a deliberate attack by a foreign coalition, these instruments are likely to keep levitating. Further, the dollar will eventually top out and decline. This should add further upward pressure to these equities since they are sold globally. The price will be stable in other currencies, so it must rise in dollars if the dollar falls to maintain parity.

But the clear manipulation in Treasuries and gold is different. How did Treasury yields go down when China stopped buying them? How did the price of gold collapse when China and others are buying more than the global production month after month, year after year?

The Fed has been talking about raising the ‘target rate’ for years. That’s essentially a benchmark rate for banks to borrow money – and it levers the rest of the interest rate system. The rates have been below 0.25% for 6 years and are now at 0.1%. But if the Fed raises rates without any increase in economic activity, the banks will lose money on existing Treasuries. They will dump them into the market. The Treasury rate should rise and the existing bonds lose value very quickly. The banks would be in serious trouble, probably revealed insolvent.

The Fed keeps insisting a rate rise is near, but never seems to pull the trigger – they never will. It would destroy the artificial bond market and take the banks down with it. The system would choke. But the low rates are choking the economy and destroying real capital by raising commodity prices and keeping money in speculation rather than production.

Moreover, the forced investment in Treasuries pushes money into non-productive government debt and away from productive private investments. Cheap money creates massive malinvestment – and investing in US debt is a serious malinvestment. The smart money in commercial banks will eventually rotate away from bonds ahead of the crisis.

With ultra-low interest rates capped, the dollar is a sour bet. Markets will lose interest in dollars and realize that large sovereigns are secretly divesting. They are getting gold. When this becomes a serious whisper and is confirmed by some revelation – say China announces a much higher gold reserve and intention to purchase more – it will signal a return to the gold market. Combine this with a shortage of bullion available to the market and we will see a strong upward move in the gold price.

When China announces the depeg of Yuan to US dollar, they may announce a partial gold-backing. That will break the link of paper and physical in gold – unless the Western powers decide to let the paper rise as well (probably so, but they will get warning and front-run it profitably). In either case, gold will rise. However, China is exerting a stabilizing counterforce to dollar volatility. Gold will probably not suddenly double in price. It will jump some, but then begin a slow measured rise, mirroring the ten years after 2000. That’s not certain, but it is an educated probability.

Meantime, there will be no rate hike for the US Treasuries. The Interest Rate Swap is done at enormous leverage in high volume. The IRSwaps create artificial demand for longer term Treasuries by buying IRSwap contracts – the swap sellers buy long dated Treasuries to hedge. But if the interest rates rise, the sellers have to pay the difference. They are on the hook for $350 Trillion (not billion).

If rates rise more than a fraction, the largest banks in the US implode immediately. Derivatives counterparties will go unfulfilled. Large Treasury funds will be bankrupted overnight. It will really be market chaos. And it will be prevented by the Fed monetizing the debt aggressively. In 2014, debt was monetized over 100% of issuance – meaning prior existing debt was sold and the central banks bought it to retire it.

This increase in floating money risks an inflationary explosion in the next few years. They are sacrificing the currency to maintain the debt complex a bit longer. They are protecting the banking cartel from gross insolvency.

The Fed will continue, as is always has, to jawbone about a rate hike – ‘when the economy is strong again.’ They will never do it. They will never stop QE, either, only disguise it in a myriad of ways. When rates go up or the free money stops flowing, the weak US economy will do a nosedive. The stock market will plummet. Large businesses will go bust due to funding problems. 

Japan announced its own QE, which appears to be a mere rotation of US QE to a loyal servant. The Japanese have printed currency to a mind-numbing amount, increasing national debt to multiples of GDP. Their Central Bank has the most unbalanced balance sheet in the developed world.

Further, they have invested huge amounts in US Treasuries, taking up the slack from the FED’s pause in QE. They’ve sacrificed citizen interest to the cartel. The Japanese have put their national pension fund into US debt. It’s a smart way for the FED to kick the can, but it sells the already struggling nation of Japan down the river.

The last nail in the dollar coffin – Germany may leave the EU and is increasingly likely to leave the Euro – the monetary union. There is a political division within the nation. As the de facto leader of Europe, the German moves signal the moves of all the nations there – at least the northern ones. Most telling – Germany wants her gold back. This shows a lack of trust in the Fed and in the US as partner. Moreover, Germany has joined the Eurasian Economic Union.

The German people are having more and more dissent over US control, military bases and forced cooperation with wars like Ukraine. An anti-Fed movement has grown quite strong in Germany. The nation already has one foot out the door of the US camp, but it will take some time for a full divorce. Merkel resists, so it may not happen. However, it is critical because Germany and Britain are the most important US allies in the world.

Though Britain is making moves to be included in the Chinese new economy, she will stay allied to the anglo-sphere. Germany may not. And if Germany officially becomes part of the Eastern alliance, then the Western coalition will fall apart in full view of the world. At that point, weaker nations will see safety in following where they currently fear the US wrath. They will defect, too. France may be one of the first.

The dollar and Euro have a codependent relationship. Each side of the Atlantic tends to bolster the other to keep up the currency from falling too fast. The massive currency swaps were intended to do just that – allow the Fed to support the Euro and the Euro Central Bank to support the dollar – by buying as needed. If the Euro fails, the dollar will have no ‘wing man’ to support it. It won’t fail, but it will become much more volatile. It’s already increasingly volatile from end of 2014. But as they say – you ain’t seen nothing yet.

China’s Strategy

It would appear the Chinese leaders are practicing a tactic from the Sun Tzu in relation to the Gold Wars. War, the philosophy states, is the Tao of deception. It is also the art, in its best form, of taking whole. The essential approach is to wait for the Western excesses to gut that system, while accumulating gold and verbally denying that accumulation to the world. It’s a long-range plan, dating back to the early 80’s.

Until a few years ago, the PBOC held a legislated monopoly on gold. Per 1983 regulations, imports were allowed, but exports were heavily restricted. Individuals were not allowed to buy gold and could only sell it to the central bank. The state monopoly was finally lifted in 2002. This is a huge development, especially for the people of China. Why was it done?  

When the US legalized gold ownership in 1975, the objective was the opposite of China’s – the government intended to make it look as if owning gold wasn’t worth outlawing. The decades long drive to dismiss gold as legitimate money was in full swing – and the public fell for it. In China, the situation is reversed. The Asian giant apparently wishes to drain the global gold supply. Many analysts suspect the motive is to bring down the Western powers. At some point, as the Chinese well know, faith in fiat currencies comes to an end. At that point, gold is the final holding. As in Exter’s pyramid, it is the thing everyone wants when all value is questioned. Gold does not ever go to zero.

China’s gold production has steadily ramped up, no matter the expense – and it has not been cheap. The nation is now the largest gold producer by a serious margin. At 355 tonnes per year, China sticks the ‘gold medal’ by 31%. Australia is 2nd with a lowly 270 tonnes. Just for info, the US (237), Russia (200) and South Africa (197) take the next positions. China also imports doré bars (mix of gold and silver from mines) to refine.

During the period from 1983 to 2002, over 70,000 tonnes of gold flowed out of global markets. Only a few places were pulling it in, China one of them. Since the nation was drawing in a steady stream of gold and withholding it from citizens, it is not difficult to see that Chinese gold holdings are drastically understated. Estimates range from 8000 tonnes to upwards of 30,000 tonnes held by China’s government. The upper end would probably make it the largest quantity of gold ever held by a sovereign. The endgame is openly stated.

If the RMB wants to achieve international status, it must have popular acceptance and a stable value. To this end, other than having assurance from the issuing nation, it is very important to have enough gold as the foundation, raising the ‘gold content’ of the RMB. Therefore, to China, the meaning and mission of gold is to support the RMB to become an internationally accepted currency and make China an economic powerhouse.

That is why, in order for gold to fulfill its destined mission, we must raise our gold holdings a great deal, and do so with a solid plan. Step one should take us to the 4,000 tonnes mark, more than Germany and become number two in the world, next, we should increase step by step towards 8,500 tonnes, more than the US.

Party Secretary Song Xin (2014)

It is often argued, with convincing statistics, that China is actually well beyond the 8000 ton mark. We can combine this with the Shanghai Gold Exchange (SGE) and Shanghai Cooperation Organization (SCO). The SGE trades gold and silver. Created in 2002, it gave the public a venue for buying and selling gold. The SGE was a slow-moving, forgotten market for a long time, but the last few years have seen a rise in its ‘flow.’ The SGE only allows sales of fully backed gold. The metal must be there to trade on the exchange. This policy steadily draws physical gold to the exchange and away from the London and New York exchanges. The exchange has moved 8500 tonnes into China since 2008.

The SCO could be called an economic trade protectorate. With partnerships between Russia, China, most Asian nations, and numerous other nations, the SCO counts 50% of global population in its fold. These nations are eager to break the dollar chains and use another currency as trade settlement. The future looks increasingly clear. In order to overthrow the dollar, a gold-backed currency with major power backing will provide the lever. 

But the hammer to shatter the control will be a significant rise in the gold price. That is hard to do while the paper gold controls the price. But paper must have some link to physical, otherwise the price will separate. Paper will plummet, physical will soar. When the supply dries up relative to demand, gold will go no-offer. No one will be willing to sell gold in the teeth of a strong price rise. Why sell at $1200 today when you can clearly get $2000 in a few months or a year?

One theory about the long-term suppression of price is US- Chinese collusion. I tend to favor this theory because the US could not hold the price down so successfully if China was not complicit. Or at least sitting on the sidelines. There’s not an enormous amount of evidence for direct collusion, but the footprints make it appear so. China has been accumulating gold at a torrid pace, yet the stated national reserves never go up.

Obviously, the government wants a lot of gold to be in the country – every action is making that happen. In fact, thousands of tonnes have flowed into China from Hong Kong and other points. It would be a very long-shot if the government were accumulating zero gold. Rest assured – they are taking it in and being non-transparent. Why? Because they are taking in enormous quantities, but don’t want to raise the price – not yet. So they allow the West to keep the lid on and meantime, siphon off the physical gold. Due to the Chinese economic structure – with so much business owned by the nation – it’s hard to tell where much of that physical gold has ended up – privately held or government coffers. 

This accumulation will have a turning point. At some time, China (and Russia) will begin to force the price of physical gold upwards. This will create tremendous chaos in the London and New York precious metals markets. There is little doubt the Chinese forces will win – that is why they have been so patient and accumulated so much gold. The Western Cartel is ‘hoisting itself on its petard’ – it is creating the conditions which will destroy it. Eventually, the SGE will run out of physical gold – supplies are seriously drained already. At that point, the bid will leap upwards, setting a higher expectation for physical gold. 

On March 20th, 2015 the age-old London fix for gold ended. Before, five London banks fixed the gold price on a daily basis. As evidence in this book has shown, the fix is always down. With the new system, China has a seat at the table. Time will tell how this shapes up.

As part of this strategy, the Chinese could buy up the major OTC gold shops – APMEX, Kitco, and so forth – then steadily raise premiums through those sites. The other retailers would follow, since they get price discovery more from their fellow sites than from the spot price. This would create pressure on the capital markets for gold, revealing the discrepancy between physical and paper.

In all of this, do not expect sudden shows of public force by China. The methods are much more subtle. When the time comes, there will be a slow, but steady push from a variety of fronts, to raise the price of metals. There may be wild swings and huge leaps in price, but these will come from market forces set in motion, not from the country itself. It’s more like acupressure – using key points to stimulate the entire system.

One of these points is South America. The major move there is the canal. The Chinese Nicaraguan canal project appears to be a serious feint – or at least to have deep, ulterior motives. The project is virtually impossible, with extreme engineering and resource challenges. There may not be enough water to supply the locks. The altitude differential is hundreds of feet. The crossing is quite long. Are they doing it simply to have their own canal in competition with the US? In small part, yes.

A deeper motive seems likely – the leaders want a foothold on the South American continent and the project gives them a clear reason to establish military bases on both coasts with full land, air and naval forces – these are part of the plan. Russia also has agreed rights to move military boats through the canal.

Though this discussion seems to be moving far afield of the Gold Wars topic, it really shows how complex the world now is. Worse, it shows how events are moving out of the purely economic and toward more aggressive approaches and possibly real war. China and Russia have turned US policy back on the nation and are practicing encirclement themselves. 

Back to monetary policy, China is currently in negotiations to have the RMB included in the IMF’s proto-currency. The SDR (special drawing rights) is more of an index composed of various global currencies – US Dollars, Yen, Pounds, and Euros. The IMF appears to be pushing for SDR’s to become a global reserve currency. The IMF is on a decline in strength and probably will be unable to push its plan on the world.

It’s not clear why China wants to be included in the SDR, but the strongest case can be made for legitimacy. By inclusion in this select group of currencies, the RMB will be officially recognized as a valid reserve currency. While China holds broad economic dominance over the non-Western world, the country is still viewed as primarily a source of cheap consumer goods by the West. Its currency is also seen as not viable because of excess government controls.

However, the leadership intends to change that and has said so. In fact, the yuan rocketed up the list of trade finance currencies in 2013 – going from no. 5 to no. 2. It’s still got a very long way to go to catch up with the dollar – which holds more than 80% of trade finance, but it’s a very robust currency with an upward trajectory firmly established.http://www.swift.com/assets/swift_com/images/news/RMB_january2015_graph01.png

The currency also shot up the world payment list to no. 5. (US, Euro, and Pound are off the chart above). The chart is telling and shows how vigorously China is pushing her currency as per stated policy. The leadership wants a viable world currency and possibly even a reserve currency. 

With the Yuan’s pending inclusion in the SDR basket – the IMF’s currency – it should be depegged from the dollar. That is a major event in the world of global currencies. If it is left pegged, then inclusion makes no sense. The basket of the SDR currency exists to keep the value stable. If one currency goes down, then another goes up, so the reference – the SDR – remains stable. But if the Yuan is pegged to the dollar, then it simply goes up and down with the dollar, negating any stability effect. So the depeg, logically, must happen.

But what will the effect be? I would guess the depeg will create a massive rise in value, tempered by PBOC selling of Yuan. A rise of 20% to even 50% over a few months would not be surprising. After bouncing a bit, it would find stability at that level, but China will most likely not let it rise overmuch – it would crush export markets.

The problem with a reserve currency was shown in the earlier discussion about the Triffin dilemma: a nation must increase the amount in circulation to satisfy demand, but must restrain increases to prevent erosion of value. The other issue is a sudden rise in value by enormous increases in demand – this leads to a much more expensive export market, drying up exports. The economy slows down dramatically and unemployment shoots up, causing civil unrest. The Bank of China is even posting billboards touting the RMB as a World Currency. The one pictured is in Thailand.

Gold backed Yuan?

The overall program is having an effect – 43% of institutional money managers think the Yuan will surpass the US Dollar as the reserve currency. Even Alan Greenspan said if China changes a “relatively modest part of its $4 trillion foreign exchange reserves into gold, the country’s currency could take on unexpected strength in today’s international financial system.”

But gold is just a small part of a larger strategy. While gold is obviously important for the strength of a currency, especially backing it, that is a net negative for the economy – as stated above in regard to exports. The economic strengthening factors are buying enormous amounts of physical assets, especially in the US. Foreign Direct Investment went from $2.2 billion to $17 billion in a few years. 

China is buying up real estate and business at an epic pace, through public and private investors. Smithfield Foods, AMC movies, and the JP Morgan headquarters (recently bought at a big discount) are all owned by China. Some of the largest food producers are now outright property of the Asian giant. Private Chinese investors buy 10% of homes sold in California. There is a proposal for several ‘China City’ municipalities. The energy sector has millions of acres of shared projects with China. The largest, in New York, is planned to be 2000 acres.

What does this mean? It is partially a place to put useless debt paper to work by converting it to real assets. (Of course, this is being done quietly to not spook the bond markets.) Just as important, China is reversing the long-standing hegemony of the US. Not culturally, but economically. By owning much of the tax-paying base and productive sectors, China could become the largest employer in the United States (excepting the US government) – a very weird situation. It cedes enormous control away from the long-standing powers of the West. These, and more, are all parts of a steady, but slow-building strategy by the leaders. It uses a Sun-Tzu style of war. Rather than direct confrontation, simply flow around the enemy like water. Surround them in the area of weakness. The US is still not to be challenged militarily, but in all economic and fiscal terms, it is showing extreme stress and verging on failure. The BRICS alliance is adroitly exploiting this weakness.

Of course, China is not confining its activities to the US. It’s actually doing far more elsewhere. For example, a China City is already under contract for Belarus – for $5 billion. It will house over 15,000 people. The nation owns enormous amounts of resources and resource companies all over Africa. In fact, much of Africa is already a virtual colony. China owns Volvo and many other European companies, as well as a number of key global ports. All this paints a picture of slowly dominating global trade.

The key to that is economic alliance with Russia, an ongoing and strengthening project. The Moscow currency exchange announced a Ruble/RMB futures contract effective March 2015. The ‘de-dollarization’ of the global trading system proceeds with a steady pace, and this is one more piece of the puzzle. The primary approach will be to allow the Yuan to trade in currency markets and make it available for general trade. China will have to delink it from the US dollar as part of the process.

Russia conducts three times the trade with China as with the US. And the leadership expects that to increase. In late 2014, the two nations signed a historic set of trade agreements – including $400 billion in natural gas deals. According to Putin, “China is gradually becoming the number one economic power… everybody understands that it is inevitable.”

faqs

Is China trying to make the Renminbi the World Currency?

Most likely. They are moving slowly and have been using gold. Bitcoin appears to have confounded the original plan and they seem to be adapting to it.

Is China manipulating the currency rate?

Yes and no. China is directly controlling its rate, mostly pegging it to the US Dollar, but with occasional devaluations – this is thought of as manipulation now. However, they do it openly and floating currencies are only about 50 years old. Most currencies had fixed relations to Gold and hence other currencies before that.

Is the US Dollar in trouble, jeopardy, about to collapse, or dying?

Not immediately, but it has been on a very long-term decline, along with most other currencies. China appears to be pushing for the global reserve currency status, which would cause significant ripples in the status of the dollar and probably bring down the US standard of living.

How is the US Dollar value determined?

The US dollar is set by floating rate, largely in the foreign exchange markets. The underlying value is set from the Petrodollar, engineered by Henry Kissinger in the 1970’s.

Is the US Dollar overvalued?

It’s difficult to measure the US dollar against anything else, so it has no single value. It’s likely overvalued in relation to Gold, but undervalued in relation to stocks, for example.

Conclusion

There is little left to say, in a sense. The US is in decline and any nations who maintain that alliance will be dragged down with it. Any who oppose it will face the threat of war, economic attack or sanctions. Most Western nations (including Japan) are dying of debt and financial corruption. The BRICs are making obvious inroads and are setting to overturn the current world power. China is the leader. 

As such, these powers get to play the ‘good guy.’ In reality, they are playing the game of realpolitik. They are not morally better or worse than the Western powers, but they have a position of moral superiority. The Western decay is now so advanced that it is easy to look good in comparison. As a global community, we can hope that the Chinese coalition is successful in overturning the Western power structure – it is damaging and relies heavily on unilateral wars, covert actions, and intimidation. It lets the poor starve to profit the wealthy. It crushes weak nations ruthlessly. It claims global resources for a tiny minority of the global population. It pilfers national resources in the name of a ‘free market.’ It wreaks havoc without consequence and worships untold wealth without any examination of personal character. Some of the most depraved people are in positions of incredible power. That lack of conscience is creating a world based on fear and enmity, rather than open trade and friendly international relations.

It is, in part, merely the normal course of empire: a rising power, with the applause and adoration of the world, then a decline in economic, political, and ethical arenas with the world abandoning it in disgust. China herself has endured this cycle countless times in a long and fascinating history. We are living history – it is unfolding before our eyes. We can only hope that the public display of being the ‘good guys’ by China, Russia and allies has some truth, however doubtful that may be. We can hope it sticks and that this turning of the world’s geopolitical structure moves us to a better world. As the Buddha said, change is inevitable. This current power structure will pass, and a new one will arise. And that one will pass, too, to be replaced again.

If we remain alert, and inform ourselves, we can hold the coming leadership accountable for its actions and views. Freedom is a vanishing ideal in the West, but still a noble one. If people are not free, then they are slaves. What else can they be?

Times of great change are times of great threat and great opportunity. The threat is the rising worries over global war, oppressive governance by oligarchy, and massive police state repression of dissent. The opportunity is for humanity to wake up to the corruption and crimes inherent in all possible political, economic, and cultural systems – and work to end them. We have the opportunity to shape the world with these new, rising leaders. We have the opportunity to demand freedom for all people. Let us not waste it.