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Very little attention is
given to the global political consequences of the strength of gold, but we
can be sure that the strategy analysts in the Pentagon and elsewhere are
acutely aware of the difficulties created between the old communist bloc on
one side, and America, the UK and Europe on the other. If they are not,
they are not doing their job at a time when they know Russia is running spy
networks in the US, and possibly knows what is left in Fort Knox down to the
bar. The ex-communists are playing from a position of increasing
strength, and the West from weakness; but the issues are complex, requiring
some deductive guess-work.
The ex-communists include Kazakhstan,
Kyrgyzstan, Tajikistan, and Uzbekistan together with Russia and China who are
all members of The Shanghai Cooperation Organisation (SCO), which as a body
“promotes effective cooperation in politics, trade and economy”
between the member states. Russia’s involvement with the SCO suggests
that she sees a better future politically and economically allied with China
rather than Europe, which should come as no surprise.
Countries with observer status at the
SCO include India, Iran, Mongolia and Pakistan, and dialogue partners are
Belarus and Sri Lanka. It may just be coincidence that this group includes a
substantial slug of the world’s gold reserves in the ground, and that
eight of them have announced additions to their official gold reserves in the
last eighteen months[i]. China and Russia between
them account for 21% of global mine production, and small producers such as
Kazakhstan have considerable reserves. It is of course unlikely that the SCO
has any formal involvement in precious metals strategy as such[ii],
but it is a suitable platform for co-ordinating gold strategy between member
states.
The total declared reserves held by
these members’ central banks is not substantial at about 2,100 tonnes,
which is only 10% of the Western central banking cartel’s officially
declared holdings. But both Russia and China are unlikely to have disclosed
all their holdings. In this respect China and Russia have been
particularly skilful, by at least announcing an increase in their reserves,
rather than allowing speculation to run unchecked.
In contrast, the Western central bank
cartel deliberately withholds information from the markets, lending credence
to worst-case suspicions. They refuse to divulge leasing commitments and swap
agreements. The Fed also refuses an independent audit of its gold reserves.
While everyone accepts that central banks manipulate markets, the deliberate
lack of information encourages suspicions that the cartel has little
disposable gold left to deliver to the market. In contrast to the
ex-communists, the cartel is managing information very badly.
So where does this leave the Pentagon
strategists? They will probably surmise that control over gold markets has
already passed from the Western cartel to the ex-communists. They
should regard this as a development of the utmost importance, if they suspect
that the Cold war has morphed into a financial war. And do not forget
it was a financial war that forced communism to collapse twenty-five years
ago, when America heavily outspent the Soviets with Star-wars. This lesson is
not forgotten in Moscow and Beijing, nor should it be by the Pentagon which
originally developed this strategy. Control of gold bullion markets is
therefore of considerable strategic importance.
As if the Western central banking
cartel didn’t have enough on its plate without this complication!
Manipulating markets to keep the global economy on course is hard enough
without other central banks seeking to undermine you for political reasons.
To complete the picture, we should look
at it from the SCO group’s perspective. Russia and China drive the SCO
forum, other members generally falling into line. The observers and dialog
partners benefit from being fed useful information, which may explain why
India, Sri Lanka and possibly Bangladesh[iii] have all bought gold.
Russia may be more interested in her dominance of the world’s fossil
fuel supplies, which leaves China in the driving seat for gold, while Russia
imitates the three wise monkeys. This combination of energy and gold
strategies is particularly unfortunate for the West.
There are two possible strategies that
China might pursue with respect to gold. There is the obvious one: that she
has too little gold in her growing foreign reserves, and perhaps finds gold
to be more attractive than Western paper currencies. This is what is
commonly believed in Western financial circles. But there is another
possibility, which should worry the Pentagon, and is briefly as follows.
China only cares about gold to the
extent that it gives her economic power over the capitalist world. She can
see that the Western central banking cartel is running out of bullion as a
result of long-term attempts to discredit it as an alternative to fiat
currencies, and her intelligence sources or those operated by Russia may well
confirm this. China is unable to intervene directly, because western central
banks refuse to sell to her. And it would be unwise to buy gold in the
market: such overt action would create diplomatic and trade difficulties, and
probably lead to accusations that she was deliberately trying to destabilise
the Western economic system. This would explain why China is prepared to turn
the screw on the price by actively promoting gold and silver investment to
her own citizens. And she can encourage other non-communist SCO participants
to buy any official gold denied to her[iv].
So China now possesses substantial
power over gold, having taken little more than apparently passive action; and
every day that passes, every day her hundreds of millions of salaried
citizens hoard a little more, the worse it is for the Western central bank
cartel. As a result of China’s clever strategy the West’s
attempts to suppress the gold price now face ruin.
Besides the factual content, the
foregoing analysis is of course guesswork; but it illustrates the impossible
problem the Western central banking cartel faces as it struggles to control a
gold price fuelled by severe bullion shortages. It will have enough of a
problem bailing out the bullion banks, without having to appease the spooks
from the CIA and SIS.
There is in reality little the West can
do, other than face up to the fact that their central banks have been
entrapped. All actions, from closing the markets to outright
confiscation will make things worse, not better. The former would
create a widespread buying panic, and besides, gold would continue to trade
in Hong Kong and most probably Switzerland. The nuclear option of
confiscation of bullion for the European nations risks being challenged under
Article 1 of Protocol 1 of European Convention on Human Rights, and by
non-conforming governments on behalf of their citizens[v].
Such action would also severely disrupt over-the-counter derivative markets,
the precedence would be bad for other financial assets and capital flight
would be triggered.
The Fed et al will have little
alternative but to dismiss the impending gold crisis as not affecting paper
currencies, and peculiar to bullion, while at the same time they quietly bail
out the bullion banks. After all, Keynes dismissed gold as a barbaric relic,
and we all believe in Keynes, do we not?
[i] Besides China and Russia,
India and Sri Lanka have in the last year acquired gold from IMF sales. Both
Kazakhstan and Belarus have added to their reserves. Kyrgyzstan
and Tajikistan have added very small amounts to their reserves.
[ii] It is however involved in energy
policy and cross-border infrastructure.
[iii] It seems reasonable to
expect information available to India and Sri Lanka to be passed to
Bangladesh.
[iv] The intelligence services
erred badly in not stopping the IMF from selling to India and Sri Lanka. It
would have been better for the IMF to sell secretly to the bullion banks to
ease the market situation.
[v] Imagine the position of a
Chinese or Russian national or entity with gold held at a depository in
London. Confiscation would bring about a diplomatic crisis. Alternatively,
imagine the outcry if such action was limited to gold held in the
jurisdictions of the Western central bank cartel, applying only to their own
nationals to the exclusion of foreigners.
Alasdair McLeod
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