US vs China: Chess with Gold Kings and Stock Market Queens

US China Chess Match

The primary large-cap US indexes seem unstoppable – again. I would argue that this is manipulation, too. The ESF (Exchange Stabilization Fund) is the most likely culprit, but not the only possible one. They appear to be buying up S&P futures in advance. This causes a subtle distortion in the market mechanism. The orders are large enough to move the market steadily in the desired direction. By purchasing the futures in volume, the futures price is driven upwards with respect to the market price. The commercials and large traders holding the short end of the futures trade buy up the corresponding stocks to protect their short futures trade. This buying raises the stock price.

It also allows the Fed (ESF is part of the FED) to legitimately claim they do not purchase equities. Futures on equities are not the equities themselves – they are only a promise to deliver or take delivery at a certain price.

It’s not immediately clear how long the game can continue, but it could be a long time. They have managed to continue the suppression of the gold price for a long time and even intensified it. They have created the idea in capital markets that gold is a bad investment – this seems to have been the goal. However, only Western capital markets believe this. At present, these are the largest private markets, but Shanghai and Hong Kong are on the rise and their gold exchanges are strong. They are moving physical gold.

Most of this gold comes by way of Switzerland. By all accounts, the Swiss are processing huge amounts of gold and recasting it into larger bars for Chinese demand. This belies the static gold reserves claimed by China – still at 1054 tonnes since 2009. Expect (another) dramatic upward revision in the next few years.

China appears to be accumulating massive amounts of gold in preparation for a gold-backed global currency. It is not clear if this will be the Yuan as a solitary currency or if Chinese allies will suddenly back their currencies with gold at the same time. Such a move would allow a bloc of currencies to rise strongly without a single one rising destructively. If the rise is too strong, export prices rise simultaneously. Other nations are priced out of the gold-backed nations consumer markets and the export volume dries up. Since China is an exporting power-house, don’t expect a unilateral gold-backing. Another possibility is a supra-national gold exchange note, from the NDB (New Development Bank) rather than a single nation.

Meantime, China is marching ahead, pulling surprising nations into its sphere of influence. Britain, Germany, France, Italy and Australia have applied for membership to the Asian Infrastructure Investment Bank (AIIB) – a world bank sponsored by China. Switzerland and even Luxembourg are openly ready to join. The US is unhappy about the ‘Western’ nations leaving the sinking ship of the IMF and the World Bank. Not that they have quit those institutions, but they have supported the competitor by joining. This is a significant drain on the power and prestige of the older financial bodies. When even Britain strengthens ties with China, the longevity of US dominance becomes seriously questionable.

Declining power is evident even in the United States’ backyard. The US attempt to cut Russia out of the SWIFT system of global payments backfired radically. Not only did SWIFT do an about turn and reinstate China with full privilege, but it went further and offered the nation a board seat.

It goes much further. CIPS – Chinese International Payment System – is a full-scale alternative to SWIFT. CIPS will dramatically increase trading hours, liquidity, and risk reduction for the markets in RMB. Aside from being an affront to SWIFT – the dollar throne – CIPS makes a bid for the Yuan to become a global trade currency. Still a few steps from a reserve currency, the trade platform is an important component toward that prize. It should make the Yuan freely exchangeable. 

While China and Russia work out an official alternative to SWIFT, a beleaguered Mid-East country started the ball rolling. Iran invented a gold payment system for trade. They sold oil to India. India bought gold from Turkey – an ancient gold trading post. The gold went from India to Iranian banks, which sold it to the Iran Central Bank. Voilá – instant gold trade system, now being recreated in other locations. It’s highly significant, because it works around both US sanctions and the US dollar as a trade settlement. The US dollar comprises 80% of global trade, but that number will steadily decline. However, the change-over will be slow and difficult. Reserve currency status carries its own set of problems, mostly notably the bind between inflating the currency so that enough is available and limiting inflation so that value is maintained.