By Dan Popescu - Gold & Silver Analyst for Goldbroker.com
“Who owns the gold makes
the rules” seems to be what the Chinese and the Russians are thinking. This
is why, since the financial crisis of 2008, both countries are in a stampede
to fill their coffers with gold as fast as they can. We are aware of the
currency wars, but we are a lot less familiar with the gold wars raging
between the East and the West and, more particularly, between China and the
United States.
Even though since the
Bretton Woods Conference in 1944 the United States is doing everything it can
to discourage countries from owning gold as monetary reserves and pushing
them to choose instead the US dollar, it does not do it itself (do as I say,
not as I do). As it can be seen in graphs #1 and #2, the United States keeps
71.1% of its reserves in gold, and is the second largest holder of gold in
the world since the creation of the European Union. The global average of
gold reserves is 9%.
Graph #1: World
Official Monetary Reserves in Gold - Advanced and Emerging Countries in Total
Reserve Percentage
Graph #2: Official
Gold Holdings (tonnes) - Advanced Countries and
Emerging Countries
We should still keep in
mind that these numbers are not up to date. China has not informed the IMF of
its gold reserves since 2009. It is also the case for Saudi Arabia and,
maybe, other countries. I think China will do it this year, perhaps at the
gold conference to be held in September in Beijing, China. I wouldn’t be
surprised at all if China were to announce holdings larger than that of the
United States (if only by a single tonne), which
stand at 8,136.5 tonnes. On the other hand, it
could announce a lower amount and make another announcement at a strategic
future date. A recent study from Bloomberg Industries speculates that China
already owns 2,710 tonnes of gold and other studies
point to 6,000 tonnes. It all amounts to
psychological warfare within this currency/gold wars going on between
countries, especially since the 2008 crisis.
If one listens to what
Chinese officials have to say, it has become obvious that China has chosen
gold as a weapon of choice in these currency wars, in line with the objective
of eliminating the “exorbitant privilege” that the United States has since
the Bretton Woods Conference and creating a new international monetary
system. This “exorbitant privilege” consists in having one’s own currency
being used as an international reserve currency without even any gold
backing, that Nixon abolished in 1971. As of now, the US dollar represents
close to 61.4% of global currency reserves, and the euro 24.2%.
Statements of Chinese
officials are confirmed by a steady flow of gold from the West to the East.
One can see the parabolic rise in Chinese gold imports through Hong Kong in
graph #3. In addition, one must not ignore direct buying from local gold
mines by China and Russia as well.
According to Alex Stanczyk, from Anglo Far-East, China owns an enormous
amount of gold “off the books”, by using proxies, in order to keep the amount
of its reserves secret. This is very “Chinese”, says Alex Stanczyk,
if one understands the Chinese mentality. There is a game that the Chinese
play, it is called Weiqi, and it is similar to
chess. In Weiqi, you have to surround your enemy
slowly and lay a trap, and then close the trap all at once. That is the way
the Chinese think. They don’t really disclose what their plan is; they just
move tiny pieces around the board in a seemingly incoherent way, but when all
the pieces are lined up that’s when the trap is sprung. All of the government
party leaders play this game, and the CEO’s and chairman of China’s largest
businesses are all part of the party. Kenneth W. Hoffman, senior analyst in
metals and mining at Bloomberg Industries, says that, “based on conversations
with officials in China and Mongolia, it’s evident that China feels they want
as much gold as the U.S.”.
Graph #3: Net Yearly
Chinese Gold Imports From Hong Kong
However, let us not
forget the less obvious role that Russia is playing in these gold wars. It
has also decided to do all it can to dethrone the US dollar from its
pedestal. We observe, in graph #4, that Russia, after the financial crisis,
has also decided to increase substantially its gold reserves. Contrary to
China, I think Russia is less patient, and is
maneuvering behind the scenes for a quicker change to the monetary system.
The massive gold buying and geopolitical strategies of Russia do confirm, in my
opinion, this speculation.
Graph #4: Russia’s
Central Bank Gold Reserves
Other countries could be
playing secondary roles, albeit strategic ones, in this gold war. As it can
be seen in graphs #1 and #2, the European Union is the largest holder of gold
reserves in the world. Saudi Arabia is also diversifying its reserves,
quietly buying large quantities of gold. Like China, it also announced, four
years ago, that its gold reserves had grown sensibly, by a simple account
transfer. Because of its importance in the oil market and the relation
between oil and gold prices, Saudi Arabia should not be dismissed. It could
also follow China with a similar announcement. India is also a large holder
of gold, maybe even the largest. Even if India only possesses 557.7 tonnes in its official reserves, it is estimated that
there is between 20,000 and 30,000 tonnes of gold
in India, if we tally the gold held by individuals and other institutions. It
is believed that India, which accounts for 20% of the world population, owns
about 20% of the global gold stock.
It is now obvious that
there are currency and gold wars between the West and the East with, out in
front, the United States and China. The United States, at all costs, wishes
to maintain the present system, which is very much in its favor, whereas
China and Russia would like to replace it. Central banks’ gold reserves are
kept secret and it is difficult to know with precision what they really are.
Even the United States doesn’t want to publish the exact numbers of its gold
reserves. We supposedly know the amount, but we don’t know how much of it has
been leased. As far as China is concerned, there is no information available
that would show how much of the significant amount of gold being imported
into China is destined to their central bank’s reserves. However, one can
speculate that it would be most of it.
Gold has always followed
wealth and, these days, wealth is shifting from the West to the East. As it
can be seen in graph #5, advanced economies (generally in the West) have
gotten poorer and, consequently, have increased their levels of debt, whereas
emerging economies have gotten richer and have reduced their debt. A similar
phenomenon occurred the other way around in 1945 when Europe got weaker
(mainly because of two wars) while America got richer. That situation had
caused a massive transfer of gold from Europe to America.
Graph #5: Total
External Debt (public and private) in GDP percentage : 22 advanced
economies and 25 emerging economies, 1970-2011
Notice, in graph #6
below, the acceleration of the increase of Asian gold reserves as a
percentage of global gold reserves.
Graph #6: East vs
West – World gold reserves vs Asian gold reserves as percentage of world
reserves
In conclusion, one must
expect, this year or next year at the latest, a major crisis in the
international monetary system that will cause a massive selloff of the US
dollar and, consequently, a massive loss of its exchange rate. At the same
time, I expect the central banks and sovereign funds to accelerate their gold
buying, which will cause the price of gold to go higher quickly. This rise
will continue until a new monetary system takes place. I am convinced that,
within five years, central banks will have augmented their gold reserves from
today’s 30,000 tonnes to 40,000 tonnes,
which would correspond to the ‘60s peak (see graph #7). I believe these gold
wars between the central banks will push gold toward a level much higher than
$5,000.
Global world reserves vs
global gold production
Dan Popescu - Gold & Silver Analyst for Goldbroker.com
Twitter: @PopescuCo
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