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Will China Make the Yuan a Gold-Backed Currency?

George Washington's picture





 

If China Backs Its Currency with Gold, It Could Have Profound Effects for Investors … and Consumers

Larry Edelson – - writes today:

I know for a fact that Beijing wants its yuan to eventually become a gold-backed currency,
much like the Swiss franc was originally. Backing the yuan with some
gold will certainly help it become a major international currency.

Edelson
is a financial adviser who travels frequently to Asia, a former
high-volume gold trader who is interviewed a lot in the mainstream 
financial media.

I have no idea whether Edelson is right or not.  But he’s not the first to make the claim.

Doug Casey says that if one country – such as China – switches to a gold-backed currency, the dollar will be toast:

All it will take for the world to realize that U.S.
dollars are nothing more than hot potatoes is for one country (Doug
postulated that maybe China would be first) to introduce a gold-backed
currency. If China introduced a gold-backed yuan, for example, who on
earth would want anything to do with U.S. dollars?

Similarly, SafeHaven points out:

Suppose a large exporter, such as China, which
undervalues its currency and runs a large trade surplus as a result,
takes a huge radical step and goes all the way to a 100%-reserve gold
currency. The ultimate hard currency. If this succeeds, China is the new
England – the financial capital of the world, forever. Everyone else’s
money? In a word: pesos. Hard currency is Chinese currency. China’s
natural supremacy over the barbarian kingdoms of the West is restored.

Goldcore argues:

China is clearly trying to position the yuan or renminbi
as the alternative global reserve currency. The Chinese likely realise
that they will need to surpass the Federal Reserve’s official, but
unaudited, gold holding of 8,133.5 tonnes.

 

***

 

World Bank President Robert Zoellick recently mooted the possibility
of a return to some form of gold standard. It seems extremely likely
that senior and influential Chinese policy makers, bankers and 
government officials may be having similar thoughts.

Simit Patel writes:

China’s central bank continues to aggressively accumulate
gold. Is this a setup for making the renminbi a gold-backed currency?
Many have speculated that this is the game plan. Certainly a currency
that is gold-backed will have appeal as a reserve currency capable of
storing wealth; indeed, the reason why the US was able to position
itself as a reserve currency is largely because it was once pegged to
gold.

MaxKeiser says:

China is clearly trying to position the yuan or renminbi
as the alternative global reserve currency. The Chineselikely realise
that they will need to surpass the Federal Reserve’s official, but
unaudited, gold holding of 8,133.5 tonnes. China is the sixth largest
holder of gold reserves in the world today and officially has reserves
of 1054.1 tonnes which is less than half those of even Euro debtor
nations France and Italy who are believed to have 2,435.4 and 2,451.8
tonnes respectively.

 

***

 

[This]
game theory article is great because it points out that China does not
need to amass a gold stock similar to the US, it can simply go to a gold
standard now and effect a simultaneous devaluation against the dollar
(as game theory dictates that the US and all other CB’s would be forced
to follow China’s lead, or risk losing all their capital as investors
buy the only gold backed currency in the world).

And Wikileaks noted several reasons for China’s stocking up on gold.  ZeroHedge summarizes:

As the following leaked cable explains, gold is, to China
at least, nothing but the opportunity cost of destroying the dollar’s
reserve status. Putting that into dollar terms is, therefore,
impractical at best, and illogical at worst. We have a suspicion that
the following cable from the US embassy in China is about to go not
viral but very much global, and prompt all those mutual fund managers
who are on the golden sidelines to dip a toe in the 24 karat pool. The
only thing that matters from China’s perspective is that “suppressing
the price of gold is very beneficial for the U.S. in maintaining the
U.S. dollar’s role as the international reserve currency. China’s
increased gold reserves will thus act as a model and lead other
countries towards reserving more gold. Large gold reserves are also
beneficial in promoting the internationalization of the RMB
.” Now, what would happen if mutual and pension funds finally
comprehend they are massively underinvested in the one asset which
China is without a trace of doubt massively accumulating behind the
scenes is nothing short of a worldwide scramble, not so much for paper,
but every last ounce of physical gold…

 

From Wikileaks:

3. CHINA’S GOLD RESERVES

 

“China increases its gold reserves in order to kill two birds with one stone”

 

“The China Radio International sponsored newspaper World News Journal
(Shijie Xinwenbao)(04/28): “According to China’s National Foreign
Exchanges Administration China ‘s gold reserves have recently increased.
Currently, the majority of its gold reserves have been located in the
U.S. and European countries. The U.S. and Europe have always suppressed
the rising price of gold. They intend to weaken gold’s function as an
international reserve currency. They don’t want to see other countries
turning to gold reserves instead of the U.S. dollar or Euro. Therefore,
suppressing the price of gold is very beneficial for the U.S. in
maintaining the U.S. dollar’s role as the international reserve
currency. China’s increased gold reserves will thus act as a
model and lead other countries towards reserving more gold. Large gold
reserves are also beneficial in promoting the internationalization of
the RMB
.”

 


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Wed, 05/23/2012 - 01:33 | Link to Comment HungrySeagull
HungrySeagull's picture

Fuck you for saying egypt for wrapping Benjies.

Hell the Egyptians today are going Islamic... they HATE all things Western.

It is not personal... just a reaction...

I have seen the Gold Standard in the USA prior to the 70's when it was disposed of as a inconvenient safety mechanism

I for one welcome the Gold Standard and the resultion ration drop from 50 to 1 silver up to about 12 to one..

This oughta be good.

Wed, 05/23/2012 - 06:38 | Link to Comment deez nutz
deez nutz's picture

Fuck you for saying egypt for wrapping Benjies.

 

 

 

 

ok then.  They would wrap his azz in the loved Euro.  Just make sure its FIAT!

Hell the Egyptians today are going Islamic... they HATE all things Western.

you think the Egyptians ever liked us? we bought their friendship for over 30 years. (with Fiat of course! gold would have been to costly)

Tue, 05/22/2012 - 20:59 | Link to Comment batz
batz's picture

 

Part of the reason gold will never make $3000 is because the price will be attacked viciously by the Fed and the US to prevent China's holdings from backing a new reserve currency.

http://asportinginterest.blogspot.ca/2012/05/enter-sinobuckand-reserve-c...

China allegedly has 1056 tonnes in gold reserves, at about $60M/tonne in current prices. Lever that 20:1 and you've got about $1.2trn in gold backed "sinodollars" against only $2.0trn in USD reserves.

The manipulation games are about to get serious.

Tue, 05/22/2012 - 21:03 | Link to Comment Alpha Monkey
Alpha Monkey's picture

I'm currious what happens when PAGE opens and gives people an alternative to the fed controlled systems with 1:1 backed contracts.

Tue, 05/22/2012 - 21:15 | Link to Comment George Washington
George Washington's picture

What's PAGE?

Tue, 05/22/2012 - 21:59 | Link to Comment sitenine
sitenine's picture

You wrote an article about China and Gold, and you don't know what PAGE is?  That's just retarded.

Wed, 05/23/2012 - 00:44 | Link to Comment sitenine
sitenine's picture

If I may interrupt you junkers for just a moment, I'd like to refer you to an old, tried, and true saying: "Stick to what you know."  GW has his moments and his subjects, but China's Gold is sure as hell not one of them.  Anyone who either knows what they are talking about or that does more than 30 minutes of good research on China+Gold, knows exactly what PAGE is and also knows the importance of PAGE, what it caused, what killed it, and what is planned next.  Simply dismissing it as a non-event is sophomoric, and shows no understanding of the matter.  Thank you.  You may now continue junking.

Wed, 05/23/2012 - 08:08 | Link to Comment _underscore
_underscore's picture

I'm equally astonished - even the most cursory thumb through of  the literature/context/history reveals the Chinese' PAGE ambition. I'm seriously begining to doubt the intellectual bona fides of some posters & commenters on this site.

Tue, 05/22/2012 - 21:35 | Link to Comment Alpha Monkey
Alpha Monkey's picture

Well, it was the pan-asian gold exchange.  However, it seems I'm behind on my news.

http://politicalmetals.com/2012/03/03/page-is-dead-new-allocated-silver-...

Wed, 05/23/2012 - 02:25 | Link to Comment Non Passaran
Non Passaran's picture

Yep, that didn't work out. I dint see why the silver alternative would either, if "they" stopped the gold exchange from opening. I wish these guys luck as I wouldn't mind to have an additional source of silver.

Tue, 05/22/2012 - 20:45 | Link to Comment eddiebe
eddiebe's picture

I would say that the military might of the USA has something to say and do about a change in reserve currency. Beside that formidable obstacle, I doubt that the g-men of china think much differently than the g-men of the western world. Why would they supplant the printing press where they can at will create all the money they want for themselves?  And then there is the evidence of the price of gold itself. It doesnt seem to me like there is a major buyer the likes of China out there, at least not lately. If there is, who is selling enough to them in the amounts needed to supplant the 8000 tonnes we supposedly have. European central banks arent selling anymore. Maybe they have figured out a way to turn Lead into gold.

Wed, 05/23/2012 - 01:54 | Link to Comment Element
Element's picture

And global production is rising due quasi-predictable high-prices. Production rose about 10% since 2008, so demand growth is still soaking up new production. 

http://www.goldsheetlinks.com/production.htm

Production is very likely to keep ramping a long as the Sovereign default collapse continues to be a real and growing possibility, i.e. several years at least.

The >$1,900 was anomolous (does anyone even know why? ... i.e. someone suddenly bought a big pile of gold), ~$1,650 is about where it should be on a 5-year trend.

Wed, 05/23/2012 - 01:30 | Link to Comment HungrySeagull
HungrySeagull's picture

You are fooled by the illusion of our might. what? 1 million boots? Half of which are PTSD and in VA care? Bah, China can raise 2 million boots at home within a week for domestic floods and millions more for war very quickly.

If I had to fight china, it's going to be their food supply that goes first and hang on for as long it takes for them to get too hungry to fight.

Tue, 05/22/2012 - 21:15 | Link to Comment piceridu
piceridu's picture

How much gold that stays in China goes unreported? Answer might be here:

http://en.wikipedia.org/wiki/Gold_mining_in_China

and here:
http://www.atimes.com/atimes/Southeast_Asia/MA08Ae01.html

China plans to construct several routes linking
its remote southwestern region with ports in Myanmar
and on to Southeast and South Asia.

Most foreign investment in mining in Kachin
State has come from companies based in China.
China has become Burma’s biggest trading
partner by far due to it’s proximity, it’s rapidly
growing economic strength, its hunger for
resources and it’s refusal to participate in
political and economic sanctions against the
regime.

Tue, 05/22/2012 - 21:15 | Link to Comment Alpha Monkey
Alpha Monkey's picture

Why would they supplant the printing press where they can at will create all the money they want for themselves?

Maybe because they can position themselves as operators of the printing presses by booting the current operator out of his seat by temporarily offering a stable alternative... before going the way of the printer.

Tue, 05/22/2012 - 20:55 | Link to Comment smb12321
smb12321's picture

I agree.  China is NOT going to develop on a laisse-faire economic system.  There's is a centrally planned umbrella with "private" firms acting with some degree of independence.  The biggest problem in replacing the dollar is perception and tradition.  For 70 years the dollar has been the default currency around the world.  I know few countries that would drop it for the remnibi no matter how bad it got.   GW is (as usual) dreaming. 

Tue, 05/22/2012 - 23:40 | Link to Comment Winston Churchill
Winston Churchill's picture

That same perception was also prevalent in the previous

reserve currencies.

It can only be the .....,until it wasn't.

The US is way too complacent about the dollar.

It can also no longer afford to prop it up with a way too

extended militarywhich is also  too reliant on suspect Chinese

electronic components.

The intergrated chip is the modern Trojan horse.

Trapdoors suckers.

 

Tue, 05/22/2012 - 22:21 | Link to Comment cranky-old-geezer
cranky-old-geezer's picture

 

 

GW is (as usual) dreaming.

Yes, because he's not looking at the whole picture.

It certainly wouldn't happen in the context GW presented here, so his article is BS as usual.

But it could happen if China was ready to face an all out assault on all fronts, military / espionage / trade / etc, because it would knock USD out of WRC status, defacto if not dejure, collapsing the dollar maybe 50% overnight, and USA just can't afford for that to happen, it would wreck what's left of our economy, collapse the market for US treasures, and other things, basically plunging America into chaos.

But other nations around the world want a stable currency for trade & reserves, they don't care who provides it, and they would flock to China's gold-backed currency.

China couldn't deal with that all out assault by themselves.  So they'd have to have some major military power allied with them, and it would be Russia.  Not from a conventional warfare sense, but from a nuclear warfare sense, and yes, nuclear is the only thing that would make America back off and accept USD being knocked off its king-of-the-hill position and subsequent collapse.

It might be India too, another nuclear power, maybe even Pakistan.   I'm confident China would get all the nuclear powers possible on their side before doing the currency thing.

And yes, gold backing is just 1 notch above meaningless.  It purely a psychological advantage.  It doesn't prevent them from running the printing presses.

But that's all WRC status does for the dollar now, just psychological advantage.

And Bernanke keeps running the presses, flooding the world with dollars, abusing that psychological advantage

...why that psychological advantage is going to end.

Tue, 05/22/2012 - 20:44 | Link to Comment orangegeek
orangegeek's picture

Sure - the world will switch to a communist's currency. 

Tue, 05/22/2012 - 21:00 | Link to Comment nmewn
nmewn's picture

Don't discount the notion, it's a central planners dream come true.

They give you only the reports, data, spin etc. they want you to see...kinda like the BLS with a gun ;-)

Tue, 05/22/2012 - 21:03 | Link to Comment akak
akak's picture

Is it any more likely that the world will continue indefinitely using the fiat currency of a manifestly bankrupt and increasing fascist warmongering regime that seems Hell-bent on alienating even its supposed "allies" in the unsustainable, immoral and futile quest to maintain its currency's premier reserve status?

Tue, 05/22/2012 - 22:57 | Link to Comment DaveyJones
DaveyJones's picture

...or a currency of any clearly dying empire. Well said Akak

Tue, 05/22/2012 - 20:41 | Link to Comment sessinpo
sessinpo's picture

The best nation to have a gold backed currency is one that has the most physical in reserve. Otherwise, all is nonsense. But it does bring up the subject of how the finite amount of gold can back the trillions in currency floating around.

My answer, severe deflation which involves severe contraction of the money supply worldwide - global depression. I think we are right on track for that.

Wed, 05/23/2012 - 01:28 | Link to Comment HungrySeagull
HungrySeagull's picture

CHINA has been buying physical GOLD by the SHIT^LOAD... The more this stuff drops, the more gold they buy.

If China gets the Gold Standard before we do... this old man is gonna have feelings not seen since youth.

It might be enough to toss a gold coin or two on top of the Silver.

This is gonna be damn good, hot diggity~

Tue, 05/22/2012 - 20:41 | Link to Comment max2205
max2205's picture

You got a point. This would take the S&P down to 300 in a day.

Tue, 05/22/2012 - 20:32 | Link to Comment Sutton
Sutton's picture

" We wil be doing QE3 to make Gold too expensive for China to buy." Benjamin S Bernanke

Tue, 05/22/2012 - 20:23 | Link to Comment skepticCarl
skepticCarl's picture

You are dreaming, George.  A strong Renmindi (or is it Remnibi?) would kill the golden goose export model overnight.

Wed, 05/23/2012 - 08:13 | Link to Comment _underscore
_underscore's picture

When did a strong currency ever stop the Americans, Germans & British having a strong exporting economy? (present artificial times excepted, of course)

 

It's a myth that a weak currency is all that makes a country successful - if it were true Greece would have ruled the world with the Drachma & be fighting with Spain's mighty Peseta & the Turkish Lira for world domination.

Wed, 05/23/2012 - 01:14 | Link to Comment Element
Element's picture

 

" ... A strong Renmindi (or is it Remnibi?) would kill the golden goose export model overnight. ..."

If they have more gold than almost anyone (except Australia and USA, the other two countries with very similar levels of gold production to china) and Beijing needs to grow the domestic consumption component of their economy, so that full-employment is less reliant upon export trade, with otherwise fiat-collapsed broke economies ... won't they do anything they need to at that point?

Tue, 05/22/2012 - 21:37 | Link to Comment Vlad Tepid
Vlad Tepid's picture

Renminbi.

If the economies in the West fall of the cliff or start hyperinflating, the export model will die all on it's own.  I think this is *one* of the eventualities China is looking at.  They're not looking at a coup d'eta as that would stop what has been, up to now, their gravy train.

Tue, 05/22/2012 - 23:41 | Link to Comment john39
john39's picture

the banker parasites have set up shop in China and are ready to make the transition there after the current hosts (U.S. and Europe) die. 

Tue, 05/22/2012 - 22:55 | Link to Comment DaveyJones
DaveyJones's picture

That If's got some pretty solid odds. Makes sense. Be the first in position. There's another factor - the billions of other people outside the 1st world economies quickly building interdependent systems that need less and less of the west. 

Tue, 05/22/2012 - 21:32 | Link to Comment Al Gorerhythm
Al Gorerhythm's picture


There once was a new nation of people that, from the fruit of their labor, saved one ounce of gold. The workers of the nation collectively created a factory that produced widgets which by law, could only be bought with tokens backed by the gold. The token (ounce of gold) bought the first widget off the line but then they produce another one. There was no other gold to purchase the next widget so the people of the nation voted to revalue the gold. They soon learned that it wasn't the gold that was revalued, it was the widget. The widget only cost 1/2 an ounce of gold, so they repriced the widget. They produced another 98 widgets and watched in awe as their widgets became less expensive. 1/100th of an oz for a widget. Boy, widgets were cheap! The fruit of their labor was paying off in cheaper widgets.

The factory was then fully automated and the robots produced the widgets for them. They sold their excess widgets to overseas buyers and demanded payment in gold. The gold they collected was used to buy materials to construct factories that made gizmos. It too was fully automated, removing the burden of work from the people who were able to focus their attention on their kids and the environment. They were debt free as the money of the realm was a store of their wealth and a valuer of goods and time. Their treasury produced a coin that the people could use for wages and local trade. The treasury also  offered interest free notes to the people to invest in capital growing industries.

The purchasing power of their "wealth tokens" grew with their developments. The people of the nation went fishing with their kids, grew crops in their gardens at their leisure, spent time reading to their children and had the need for only one person in the family to spend a portion of their day maintaining the infrastructure of their developments. The land was nurtured back to health and rivers ran clear and clean.

One day a banker came to the country, promising endless paper wealth. He would print the paper to buy the widgets. He promised the people that he and the government could provide for their needs. He didn't say at what cost. He didn't say that the government would be extracting a portion of their annual wage and their collected wealth, as interest charged by the government's borrowing from him. He didn't say that all money of the land would be borrowed from him. The government borrowed and so he printed.

The first widget cost a dollar as did the second, followed by the third and so on. The cost of widgets didn't fall at all but amazingly grew. This was because of the loss of purchasing power of the additional paper tokens. The more there were, the less they were worth so the more you had to earn to buy the widget.

He was also able to convince the people that as their bank accounts grew, they were actually getting richer. The more he printed, the higher their accounts went. They were mesmerized by the growth of their accounts but couldn't figure out why things were getting dearer or why their working days grew longer or their pay bought less. Eventually the cost of goods became so exorbitant that the people couldn't afford them, even on two wages; both parents working two jobs. The children were placed in child care and were cared for by corporate government workers.

The nation became stressed and over-burdened with debt. The bankers charged a fee for their money which soon had the nation begging them for more of the paper money. The government had to borrow money from the banker with the promise from the politicians that the people's labor would be used as security (good faith and credit 'n all). It wasn't really money they were borrowing, it was credit they were extending. The bankers didn't have any money to offer, just debt. The people didn't realize tha,t even though they had money in their pockets, it wasn't really theirs; it belonged to the banks becaused it was borrowed from them.

Eventually, the cost of money and the cost of goods went up to a level that they could no longer be afforded. The nation was soon bankrupt and the yeild on their massive bank accounts wasn't enough to pay the interest.

One day a handsome prince came into town and kissed them all and woke them up. (Yeah, right, is that all it will take?!)

The people, on awakening from their stupor, saw the mess that the banker had created in their Shangri La and realized the theft of the nation's wealth hafd been thrusted upon them via purchase of politicians through offers of priveleged positions and bribes. The banker was hung from the nearest lamp post. 

Tue, 05/22/2012 - 22:48 | Link to Comment HoofHearted
HoofHearted's picture

I love stories that have a happy ending. I'm not talking about the prince. I'm talking about the last sentence.

Tue, 05/22/2012 - 21:39 | Link to Comment Vlad Tepid
Vlad Tepid's picture

I think it would take the ugly, Shrek-like ogre hitting them across the head with the flat of a battle axe to wake this crowd up, but the prince sounds nicer.

Tue, 05/22/2012 - 22:59 | Link to Comment Hugh G Rection
Hugh G Rection's picture

Ah let the sheep get blindsided.  I'm tired of trying to shake the fucktards out of their coma. 

 

My local fedual kingdom will have a lead backed currency.  Always wished I was born in the wild west.. maybe I'll get my wish.

Wed, 05/23/2012 - 01:11 | Link to Comment rehypothecator
rehypothecator's picture

"My local fedual kingdom will have a lead backed currency.   Always wished I was born in the wild west.. maybe I'll get my wish."

 

I hate to burst your bubble, but the firearms homicide rate in the Wild West was far below what it is in Chicago, Baltimore or Washington, DC right now.  The reason the shootout at the OK Corral is famous is because it was so unusual.  How many fatalities did it involve?  Three - far less than a typical Chicago weekend these days.  

Wed, 05/23/2012 - 01:38 | Link to Comment Hugh G Rection
Hugh G Rection's picture

My dream has little to do with homicide rates, more to do with freedom.  Whiskey, gambling, whores, and open carry... A post dollar collapse paradigm I can appreciate.

Wed, 05/23/2012 - 01:43 | Link to Comment Hugh G Rection
Hugh G Rection's picture

BTW - I know a Clanton descendent, and have researched the Earp/Cowboy clash.  Tombstone is still one of my favorite movies, but Wyatt and his brothers were fucking dirty.

 

History is written by the victors.

Wed, 05/23/2012 - 01:00 | Link to Comment Jena
Jena's picture

Always wished I was born in the wild west.. maybe I'll get my wish.

 

Careful what you wish for.  It's hard being Davy Crockett.

Wed, 05/23/2012 - 01:33 | Link to Comment Hugh G Rection
Hugh G Rection's picture

2 classic Davy quotes.

"First make sure you're right, then go ahead."
"You can go to hell -- I'm going to Texas."

 

I'm no Davy, I would've tucked tail from the Alamo.  When faced with a superior force... retreat, fire, repeat.

 

My ol pappy used to say "There is no more deeply moving religious experience, than cheatin on a cheater."

Wed, 05/23/2012 - 03:12 | Link to Comment Jena
Jena's picture

Pragmatism.  I can agree with that.

Wed, 05/23/2012 - 00:03 | Link to Comment Judge Arrow
Judge Arrow's picture

Drinks all around, bailiff, then dismiss the jury. Court's in session. Now bring the banker in here for his hanging trial. 

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