China’s Golden Plan?
On Friday we revealed China’s plan to offer gold backed yuan denominated oil contracts. It’s a must read if you missed it.
There are various hypotheses around for what China’s agenda is for all their gold accumulation. (They are not alone by the way, Russia has bought around 200 tonne the last 2 years and is on track to do so again this year). Jim Rickards is on the gold backed SDR theory where the size of your gold pile is your pecking order at the table and equates that to seeing a gold price of $10,000 / oz. Bill Holter just this last week has changed his view from thinking China would never want the yuan to be the new reserve currency due to their trade balance and the headaches that come with being the reserve currency. He now has a new thesis and it makes a lot of sense. The following is in the context of our story Friday. Rather than paraphrase, here it is verbatim and you can make your own mind up….
“By making yuan convertible into gold, China in essences is creating a demand they know cannot be met by supply ... (again) AT CURRENT PRICES! Why would they do this? It is actually so simple I feel dumb for not seeing this previously. China actually kills an entire flock of birds at one time!
First, they are THE largest owner of gold on the planet so they are in fact marking the value of their treasury up by multiples. The higher future price of gold will also make it very difficult if not impossible for other nations to catch up in gold accumulation. By freeing the gold price, China is assuring their place as a world financial leader for many years if not many centuries as that is their mindset. They know quite well, gold is lasting wealth and also the phrase "he who has the gold makes the rules"!
Second, they will in essence be devaluing the yuan versus gold. This will have many benefits and too broad of a subject to breach here but think back to 1934 when the U.S. devalued the dollar versus gold, it creates "inflation" and makes debt easier to pay and service as well as giving a bump to the real economy.
Next and of great importance, moving the world "naturally" to a gold standard means moving away from the dollar standard and all the unfairness that goes with it. A world moving toward gold (China) is a world moving away from the dollar. Surely the dollar will devalue versus the yuan via lower demand from the oil trade and also the lessening of "power" afforded as issuer of the reserve currency. The U.S has enforced the dollar standard by military use for years. Is this action by China "neutral" enough and free market enough to avoid military conflict? We can only hope and pray the U.S. does not kick the table over in reaction.
Lastly and possibly most important, this scheme avoids the main pitfall Bretton Woods fell into, bleeding out treasury gold. If China refuses to convert yuan into treasury gold but instead buys the bullion on open markets they will never have their "De Gaulle moment". I know what you are thinking, there just isn't enough gold? And again I will remark "at the current price". You see, under this scenario China does not care how high the price of gold moves because they are along for the ride. The only thing they care about is not leaking ANY of the gold they have so carefully and methodically have accumulated over these years! Make no mistake, China will not convert yuan into THEIR gold, they will purchase gold on the open market to make the conversion.
Wrapping this up, China can effectively use Mother Nature and free markets to create a gold standard where they are the wealthiest ones at the table. You can be sure China did not dream this up recently, Chairman Mao purportedly said back in 1971 "this is the beginning of the end for the dollar". He was of course correct and as usual had a view far further into the future than any Westerners at the time. This course of action is logical and can certainly be considered "financial war". The only question in my mind is whether or not it leads to an actual hot war?”