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One thing is certain: gold is not part
of the old economic order, which is comprised of the US, UK, Euroland, and Japan.
The new economic order is different, embodied in the Shanghai Co-operation
Organisation (SCO) with its members, observer states and affiliate nations.
Those interested in the future course of precious metal and commodity prices
should take the trouble to understand the significance of the SCO. The SCO is
already driving prices in commodity markets, and this transfer of power from
the old to the new economic order is of tectonic magnitude, but the pace is
far from tectonic, more like volcanic.
The
driving forces behind the SCO are China and Russia, both large gold
producers. Gold will have a role in the SCO, but what it is has yet to be
disclosed. However, we do know that the SCO’s other participants are
also buyers of gold. Their actions are either freakish coincidence, or
there is a hidden agenda to include gold in the SCO’s new financial
order. This point was rammed home this week when Iran announced it had
also accumulated gold, indicating the quantity to be about 340 tonnes.
I
have written about the SCO before, and the link is here.
Iran and India are just two of the nations that have observer status and
attend the SCO meetings. They are privy to discussions and strategic
planning, including plans to defend its members from the old economic
order’s ongoing financial crisis. This is why we should regard
Iran’s gold purchases as an important signal and why we may be mistaken
to dismiss India’s purchase from the IMF as just opportunistic. The
gold purchases of the SCO’s participants follow a clear pattern and
look like an early indication of an emerging new financial, as well as
economic order.
The
reasons why the SCO’s participants are adding to their gold holdings
should also be considered in the light of the West’s continuing and
possibly deepening financial crisis. China, for example, has ended up being
exposed as the largest single holder of US dollars and debt, having
accumulated this position through currency intervention. To the extent that
this is regarded as the price of a successful economic plan, China’s
dollars are therefore expendable: the value of the dollar has been important
for fixing terms of trade, but not as a store of value in China’s
foreign reserves. Put yet another way, if you value precious metals and
important commodities, you will not regard dollars as your store of
value.
The
same must apply to other paper currencies, which explains why China’s
flirtation with the euro was brief. And not only is China adding to her own
gold reserves, she is also happy for her people to buy gold and silver.
Russia hoards all the gold she mines. The other SCO members are acquiring
gold, admittedly in smaller amounts, or have ample stocks in the ground. The
message is clear: the long-term success and stability of the SCO will be
based on sound money, or at least money more sound than the fiat currencies
of the West. And this being so, it makes sense to place a lower value on
trade with the West, because the West pays for goods by just printing the
money. It has become more important for SCO participants to use
worthless dollars to position themselves for the future than continue to
finance the West’s profligacy. This is why the SCO is the future for
Asia and promises to become the biggest economic bloc ever seen.
Reading
the English version of the Bishkek Treaty of 2007 one is struck how similar
many of the objectives are to those of the Treaty of Paris in 1951, which
marked the founding of the European Coal and Steel Community. The crucial
difference is the SCO does not seek long-term political unification, but the
co-ordination of common security and economic development. This means
that laws will continue to be decided at national level, so the
over-regulation and central bureaucracy that emasculates business in the EU
and America should be avoided.
The
SCO’s structure is therefore less political and more flexible.
This is how China will co-exist with India, India with Pakistan and Russia with
her former stans. It is intended to defuse the border disputes of the
past by allowing common interests to overtake them. The SCO will
represent about half the world’s population, the largest grouping
imaginable, making Europe and America look like two-bit players.
So
where does this leave the old economic order with respect to the new? If we
think we have financial leverage with all those dollars and Treasuries owned
by Asians, it is more limited than we think. Furthermore, forget the
idea that China will protect her dollar interests by buying more Treasuries:
her dollars are more likely to be spent on natural resources and precious
metals. If we think China is dependant on trade with the West, any such
dependency is limited and temporary, since China sees the West as merely a
stepping-stone into her own economic block: the SCO. If we think China
is dependant on the West’s financial system, she has her own plans to
extricate herself.
This
new economic order’s official languages are Chinese and Russian, and it
is these two nations who dominate the SCO. Both are major gold producing
nations, and both can see how the West’s fiat currencies are destined
for collapse. Between them, they are resource-rich. Russia is second
only to Saudi Arabia as an oil producer, and thanks to the post-communist
liberation of her economy, she has surplus grains and timber.
Russia,
under Putin and Medvedev, is now strong again. She learned the lesson
of the risks of taking salt with the West’s financial system in the
crisis of 1998. Since then, she has become progressively more
independent from the West’s financial troubles, and presumably will
wish to keep it that way. All her future alliances will be on her own
continent and under her own control, which is why the SCO is important to
her. She naturally turns to China to protect herself from the West; a
tendency enhanced by China’s own economic prospects relative to those
of the old capitalist economies.
As
the old economic order collapses, the SCO’s observer and affiliate
states will apply for full membership, and others will soon be knocking on
the door. Will they include Turkey, who has been continually denied
membership of the Christian EU? Will they include some of the Central
European states, who have tasted EU regulation and bureaucracy? Will they
include Afghanistan, Iraq, or even Saudi Arabia, disillusioned by worthless
dollars and American imperialism?
Time
will tell; but the attractions of a supranational SCO seem certain to include
a sounder currency than the dollar, euro, pound or yen; if only because all
SCO parties are accumulating gold. Those of us who myopically think
gold has run too high too fast and are praying for a buying opportunity on a
pull-back, should not forget that there are six SCO member states, four
observer nations, and two dialogue partners also buying the dips. And
if Iran is telling the truth about its purchases, they are clearing Western
markets out of the physical.
So
if you want to buy a stake in the new economic order, while shorting the old,
buy gold.
Alasdair McLeod
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