Will China Play The 'Gold Card'?

Tyler Durden's picture

Submitted by Hugo Salinas Price via Plata.com,

Alasdair Macleod has posted an article at www.goldmoney.com which I think is important.

The thrust of the article is that China, at some point, will have to revalue gold in China; which means, in other words, that China will decide to devalue the Yuan against gold.

Since "mainstream economics" holds that gold is no longer important in world business, such a measure might be regarded as just an idiosyncrasy of Chinese thinking, and not politically significant, as would be a devaluation against the dollar, which is a no-no amongst the Central Bank community of the world.

However, as I understand the measure, it would be indeed world-shaking.

Here's how I see it:

Currently, the price of an ounce of gold in Shanghai is roughly 6.20 Yuan x $1084 Dollars = 6,721 Yuan.

 

Now suppose that China decides to revalue gold in China to 9408 Yuan per ounce: a devaluation of the Yuan of 40%, from 6721 to 9408 Yuan.

What would have to happen?

Importers around the world would immediately purchase physical gold at $1,084 Dollars an ounce, and ship it to Shanghai, where they would sell it for 9408 Yuan, where the price was formerly 6,721 Yuan.

The Chinese economy operates in Yuan and prices there would not be affected - at least not immediately - by the devaluation of the Yuan against gold.

Importers of Chinese goods would then be able to purchase 40% more goods for the same amount of Dollars they were paying before the devaluation of the Yuan against gold. What importer of Chinese goods could resist the temptation to purchase goods now so much cheaper? China would then consolidate its position as a great manufacturing power. Its languishing economy would recuperate spectacularly.

The purchase of physical gold would take off, no longer the activity of detested "gold-bugs", but an activity linked to making money, albeit fiat money. Inevitably, the price of physical gold in Dollars would separate from the price of the "paper gold" traded on Comex and go higher, leaving paper gold way behind in price.

If the US were to provide the market with physical gold in the quantities being purchased for trade with China, it might be able to prevent the rise in the price of gold in Dollars; however, we know that Comex has only one ounce of physical gold for every 124 owners of paper gold, so that action would be impossible. China would be sucking up the world's gold at a huge rate, if the price of gold in Dollars were to remain where it is at present.

The only way that the US might counter the Chinese move, would be to revalue gold in Dollars; which is to say, the US would have to effect a corresponding devaluation of the Dollar against gold, to nullify the effect of the Chinese devaluation of the Yuan against gold.

At a Dollar price of gold of $1,517 Dollars per ounce, the Chinese devaluation would be left without effect: the present Yuan/Dollar exchange rate would then remain at 6.20 Yuan per Dollar: 9,408 Yuan/6.20 exchange rate = $1,517 Dollars per ounce.

This is the old policy of the 1930's, commonly known as "beggar thy neighbor", where countries carried out competitive devaluations against gold in order to preserve their manufactures and continue exporting. The response of importing nations was to raise tariffs on imported goods. (Say good-bye to an integrated world economy.)

Will China decide to "beggar its neighbors", the US and Europe? I think that the huge problem of keeping the Chinese economy on its feet and avoiding the political instability which would rage through China by not doing so - with a population in excess of 1.3 billion human beings - will be so compelling that China will practically inevitably resort to raising the price of gold in China.

When might this happen?

The world economy is going from bad to worse by the day. The Chinese may opt for this measure out of sheer desperation, and it may be a reality soon. I have the sensation that things are falling apart around the world at an increasing rate of speed. Perhaps China will move this Fall?

Devaluing the Dollar on the part of the US would upset the apple-cart of Dollar hegemony in the world. But not to devalue would price US goods out of world markets, along with European goods. "Damned if you do, damned if you don't."

Dollar devaluation would force a Euro devaluation and all Hell would break loose, as all countries would belatedly realize the importance of having gold reserves, and one country after another would devalue their currencies against gold. Import tariffs and restrictions on imports would once again prevail. The dream of "Globalization based on the fiat dollar" would evaporate in the orgy of currency devaluations against gold.

The era of the Dollar as reserve currency of the world, would have ended.

When the dust shall have settled on this giant crisis, the powers of this world will have recognized, once again, that gold is money; what would remain would be the work of establishing the gold standard de jure, by international accords, in order to abolish tariffs and import restrictions and renew the free international flow of goods.

However, another horrible scenario is possible: the US, run by those who insist on maintaining the plan for world domination through endless war, may decide to go to war with China and with Russia, too, for good measure. Let us hope that reason prevails and that the Dollar loses its status as world reserve currency in a peaceful manner.

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gmrpeabody's picture

"Let us hope that reason prevails"

you owe me a new keyboard...

SickDollar's picture

they will eventually down the road

 

pods's picture

Nope, but they will do everything in their power to prop up their debt load.

Can anyone explain how exactly China would go about devaluing their yuans against only gold?  (if that was in the story I missed it,because I rarely read analysis pieces of these Matrix markets we have now)

China could have 10000 tons of gold, but it wont matter. They are debt based like everyone else is.  

First country to go gold standard sucks on a gun barrel.

Gresham's law, bitchez.

pods

LawsofPhysics's picture

Precisely why the answer is NO.  Cognative dissonance much?

pods's picture

I was replying to the title story, fyi.

Save_America1st's picture

This revaluation would also bump phyzz silver up to nearly 21 bucks an ounce.  Don't forget about silver, folks.  And this would just be the start of the revaluation. 

Once the Crimex is drained and goes bust the laws of true supply vs. demand will take on a whole new fucking meaning.  Nobody is going to sell their phyzz for any amount of shitty fiat paper in any currency. 

Price will go parabolic in a hurry and there will be no way for the Monkeys to fly out and hammer prices down with their bullshit paper derivatives in order to stop the surge. 

Price will overshoot dramatcially and then come back down some after a while once some sort of equilibrium occurs and things settle down a bit.  But where those prices settle at could still be multiples higher for silver and gold than where it is today.

By the time all fiat has been destroyed from the currency war and the dust settles...what price would you take for your phyzz?  Who would want 50,000 dollars an ounce for gold if 50k couldn't even buy a shitty used car???

Remember the Weimar Germany chart as the Mark hyperinflated in terms of gold.  The Germans sold gold for paper thinking they were rich.  One day they had 100,000 Marks but in quick order 100,000 was worthless and gold sold for 500,000 then 1 Million, etc.  Everyone who sold thought they were rich until the next day they were dirt poor again.

And they no longer had any gold or silver in their possession. 

Squid-puppets a-go-go's picture

my dad's first job - this was in about 1960 - worked with this german bloke who said his mother entered a lottery in 1923, and won first division prize. At the time it was enough to buy a mansion, but it took 2 weeks to collect the prize and deposit the cheque in her bank.

By that time all she could afford was a good set of silver cutlery

Save_America1st's picture

Yup...well I can see that scenario happening all over again...only not just contained to one or a few countries like in the past.  This time the entire world is completely based on fiat currency.  This scenario has never happened in the history of the planet.  That's why there's no way out except planetary mutually assured monetary destruction.

I'll also give about 99% chance of a nasty world war.  They need to kill off at least a few billion of us "useless eaters", as the NWO scum like to call us. 

Here's the Weimar gold mark chart I refer to.

https://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic#/med...

 

goldsaver's picture

The PBOC can offer, thru the Shanghai Exchange,9480 Yuan per ounce of gold. This would have the effect of USD and EUR holders purchasing gold, for delivery, transporting it to China, selling it at the PBOC rate and exchanging the Yuan back to dollars and Eur at a 40% profit. Considering that Yuan can be freely "printed" by the PBOC at will but gold can not, the PBOC couldn't care less how much Yuan is in circulation. This would devalue their exports (in dollars) while having physical gold freely delivered to their shores.

The increased demand for physical, remember we are NOT talking about paper contracts here, would disconnect phys from paper price. It may "officially" remain the same but the "premiums" for physical would logically go up by 25-35%, depending on shipping charges, leaving a profit (in currency) for those who sell to China first.

China is an export nation. A strong Yuan is not to their benefit. They are also well aware that currency is not wealth.

Bank_sters's picture

China can do some arbitrage action with US treasuries, though. A gold move would strengthen the yuan, something they don't want.

Payne's picture

Gold movement upwards will occur due to all the savers in the world not desiring to be lose purchasing power in the currency wars.

Bluntly Put's picture

Article made sense to me.

 

TuPhat's picture

Then you should keep that sack on your head.

AgentHarlequin's picture

Maybe they wont... But Jesus, I know where my next payckeck is going after I read this...

http://seekingalpha.com/article/3421396-the-big-long-goldman-sachs-and-h...

Classick Kansas City Shuffle if you ask me...

https://www.youtube.com/watch?v=ag31JHU8LPU

LawsofPhysics's picture

NO.  At least not until everything else and every other country/fiat collapses under it's own idiocracy.  Read the "Art of War", the chinese are long term thinkers, not short term.

johnlocke445's picture

This whole Chinese "long term vs. short term" argument has got to go. When it's in the interest of China to do something long term they will do it long term. When it's in the interest of China to do something short term they will do it short term. Look at how quickly they decided to devalue their currency "last night". They did NOT plan this 1.9% devaluation 5 years ago.

pods's picture

China is poisoning their water and food supply to supply the West with plastic shit for conjured joobucks.

Not exactly thinking long term there. 

pods

 

LawsofPhysics's picture

So what, they are in fact buying the rest of the world.  The slave labor will stay in the polluted zones, but so what.

remember the love canal?  Fuck, every industriallized nation is doing the same thing.

pods's picture

That is the problem. When things go bad, owning land or assets in another country will mean exactly nothing.  The nation in which the assets reside still make the rules about immigration, visas, land use, etc.  

Love Canal was actually a clay lined dump, where the barrels of waste were placed.  The company that owned the land knew how bad it was.  And it was operated in the 40's IIRC.  Using the best knowledge of the time, that is what they did. They did not run a waste pipe out into the Niagra river and then say things were fine when it turned bright red, or had bubbles 10 feet high.  This is currently going on in China, today. Do they not know any better?  Seems scrubbers on coal plants would do them a bit better than having huge screens to remind the population what the sun looks like.

pods

 

LawsofPhysics's picture

Then show everyone the gold or shut the fuck up already.   The point is that you will NOT be able to do such things and remain credible on a gold standard.

farflungstar's picture

"reason prevails"

Not anymore.

BandGap's picture

My reasoning, your reasoning or their reasoning. Always the perspective.

JustObserving's picture

China may not play the gold card but its people can see the devaluations coming and should be buying gold to protect their wealth.  Chinese stock market is only worth $8 trillion but Chinese real estate is worth considerably more than $100 trillion.  Just the land value of Beijing was valued at about $20 trillion a few years ago.

All the available gold bullion in this world is worth $2.2 trillion.  The Chinese and the Indians can see the currency devaluations coming and may decide to insure their wealth with gold and silver.

Jan 26, 2011

"According to the China Economic Weekly magazine, property prices are currently so high that the total value of land in Beijing, estimated at 130 trillion Chinese yuan (US$19.74 trillion), surpassed the United States' gross domestic product of US$14.5 trillion for 2010."

Mat Cauthon's picture

Patience and steps...

Shanghai Gold Exchange is preparing to declare an opposing new gold price by end of the year.  If this destroys the London Fix, than all China has to do since they will be the primary physical market in the world is to re-price gold in relation to the amount of paper fiat printed (approx 30-60 times) and gold can easily handle backing global currencies.

Why do people always assume the gold price cant float, or be priced at a correct value in realtion to money supplies?

And it is interesting China does this devaluation a few days after the US backdoored the IMF to delay or cancel the RMB into the SDR.

http://www.examiner.com/article/imf-s-denial-of-china-into-sdr-will-lead-to-yuan-ending-dollar-domination-sooner

 

 

Dovie'andi se tovya sagain (It's time to toss the dice)

The Daily Economist 

RaceToTheBottom's picture

Funny that such a big item got so little press time?

Why the money honey's not into it?

Prober's picture
Prober (not verified) Aug 11, 2015 1:44 PM

gold is just a commodity on the modern era

there will NEVER again be a gold-backed currency

there will NEVER be a currency / monetary system that limits freedom of politicians to spend money, and create more money, to spend even more money, etc, etc, etc

NOT EVEN in China

nuubee's picture

The problem with this thinking is presuming that those in control of the levers can prevent political unrest forever. They can't, and history is full of examples of the elites fucking up a monetary system and paying the price. That's why your thinking is wrong.

Prober's picture
Prober (not verified) nuubee Aug 11, 2015 3:36 PM

History is FULL of rebellions against regimes.

The rebellers then become the NEW regime, that inevitably follows the same policies wrt money, ie

spend, borrow, create

spend, borrow, create

spend, borrow, create

til the next crash and next rebellion installs the next regime which then proceeds to

spend, borrow, create

spend, borrow, create

spend, borrow, create

You see the pattern ????

 

This is why in 10,000 years of civilization, there has *NEVER* been a regime that did NOT spend and debase and borrow and debase and crumble or crash.

Humans are too defective to manage their own societies effectively and with satbility long-term.

 

johnlocke445's picture

The only way China will maintain a stable economy is to plan for a gold based monetary system. With a population of 1.5 billion people the government cannot afford to allow a fly-by-night fiat, debt based currency to ruin them. If they continue with an irresponsible currency they can expect to see revolution.

pods's picture

And we know how responsible the Chinese are. Stewards of the land they are.

pods

Payne's picture

As long as currencies are managed around exports then yes there will never be a gold backed currency.

KnuckleDragger-X's picture

Bring back Smoot-Hawley and really get this disaster up to speed......

earleflorida's picture

by Chan Akya @      http://www.atimes.com      8/11/15

"China Yuan devaluation: Let he who hasn't sinned.."'

http://atimes.com/2015/08/china-yuan-devaluation-let-he-who-hasnt-sinned/

Indeed, China will go to the "Gold Standard"! Period!!!

Gold is the only financial instrument for intrinsically nipping inflation/deflation in the bud. It's that fucking simple...[?]

LawsofPhysics's picture

Sure they will and The Fed will raise rates too....   ...someday.

pods's picture

lol, no matter when or where I see "raise rates" it makes me chuckle.

pods

KingOfMilwaukee's picture

It is absolutely ridiculous to imagine that China would go to a gold standard. Delusional actually.

A country that creates fake cities and throws people in jail for talking about any weakness and worries that anything less than 7% growth means social chaos and lies about it's numbers and makes selling stocks illegal..... they are going to adopt the spending limits of a gold standard?

Get real. 

Latitude25's picture

I guess your reading comprehension is not so good.  The article does not state that China will go to a gold standard, only that they will revalue the Yuan.

JLO's picture

Russia has the new golden rouble as their FED symbol. I think they will make a play with gold

JLO's picture

may be attractive @ 66 RUB per Dollar.

JLO's picture

less debt than any country of 4200.00 per citizen and a depleting monetary base.

 

Unlike the growing dollar that the USA will print continuously.