Tuesday, May 19, 2015

The Inevitable Role of Gold

As the simple meme of China's currency valuation strategy creeps into the mainstream flow, it is indeed possible that paper gold could "rise" in paper dollars. But that is not the real move which lies ahead.

While some will say the "real move" is to be determined solely by China's up-bid for gold in Yuan, the world of currency interdependency's is a bit more complex than this:
Control over the worldwide currency markets is why China wants to control the gold market. It is already taking affirmative steps to establish that control, and that is what is behind the announcement that the Shanghai Gold Exchange will establish a yuan-based gold fix before the end of 2015.
If only things were that simple. The entire world-wide global monetary system is inter-dependent upon (mostly) dollar denominated derivatives ... which can trigger counter-party claims based primarily upon changes in the dollar discount rate. China has said that it can and will disregard such claims, yet it fully understands the ramifications of such a break from BIS and IMF protocol (considering its obvious desire to be a "member in good standing" of both).

And now, Rickards chimes in with similar sentiments, making the well considered point that China's bond market simply doesn't have the transactional depth or maturity of the USD or Euro. In my first version of this post, I had gone into some detail regarding this, but since Rickards has covered the issues in the link above, brevity can be achieved instead.

Sticking with Rickards observations, the meme breaks down into two versions. (1) China (and the BRICS) creating a new international monetary system ... or (2) China establishing greater influence over the old. A third concept I like (as does China it seems) is the idea of hedging for both.

Yes, it is no doubt true that China wants to have an impact upon the FX market. I think the word "control" is as misleading a term as "currency manipulator". China can certainly set a floor in Yuan for its gold, and this will impact the gold marketplace to some degree, as well as the FX market. After all, ALL trades are essentially currency trades. But this focus on using physical gold as a tool to dominate debt markets is a bit misplaced I think.

I would like to offer a slightly different view than the "1 from Column A" or "1 from Column B" dichotomy of China's clean break from the dollar reserve system vs. it's complete acquiescence to that system (only with substantially more power to influence it).

If we look at China's economic development in Eurasia, it's BRIC partners can employ their middle classes with ambitious infrastructure projects from pipelines to railways to nuclear power plants, energy and gold exploration, military and technological development, education and international humanitarian aid, etc., all within the construct of a newly created system of infrastructure banks, development funds, and economic unions. These would be considered "competing systems" to the IMF / World Bank protocol if the dollar faction were "sanctioned" (a now familiar economic weapon). But it is not.

The West, pre-occupied with its celebrity personas and the financialization of smart-phone gadgetry and social media twiddling, has been welcomed into this "physical plane" world of emerging market economic development, and many have wisely accepted the invitation in some fashion. The BRICS do not depend heavily upon debt-backed dollars to engage with each other in these new, real world development ventures. But their ties to the old world of IMF servitude and dollar debt in the financial plane is long and deep indeed, which can indirectly impair this development.

So China, as the great moderator in this global shift from a debt-based system to an equity-based system has taken on the responsibility of keeping debt stable through the transition, as much as it can, despite the impossibility of any long term sustainability of "debt-as-wealth". The objective here is a soft landing, an avoidance of some post-Apocalyptic Thunderdome.

We have a world that worked well for the middle classes through the evolution of its timeline, based on the long-term debt of a single nation being held as a global wealth reserve asset. That world is changing as its system ages, has become corrupted, and now serves primarily the interventionist class, exploiting the working class in a "financial plane dominant" casino that rewards through manipulation. True economic development is stagnant in this system, and as the old empire collapses, we see its final struggles to maintain power and influence.

China, Russia and India are careful not to upset the aging hegemonic system ... to a point.

Meanwhile, in the new world of thriving middle classes, infrastructure development, quality education and humanitarian purpose, GOLD will be held as the global wealth reserve asset. This system can grow as debt inevitably fails through lack of credibility. And while the new equity based system can co-exist without the need to destroy the old, its very presence and success ultimately destroys the credibility of the old derivatives casino, in essence simply allowing it to self-destruct in a series of default workouts similar to what is happening in Greece today, but on a much more massive scale.

So here again, the proponents of the equity based, gold-backed global economic system are in agreement with the logic of any and all who see the inevitability of debt collapse, and wish to transition from this collapse as safely and easily as possible, without provoking the war machine of the old system (unless absolutely unavoidable) and at the same time inviting the old system to undergo a smooth transition vs. a major hard landing collapse.

This is the role of China, Russia and India's combined 30,000 tons or more of gold - to back a new equity based system. The Western view tends to transfer its own exploitative ideology into the Eastern strategy, seeing Eastern gold as a means to manipulate currencies or attack rival systems. But a more objective view understands the logic of a "win-win" situation with a long track record of success.

This is not to say that the rich and powerful of the East have the undisputed moral high ground over the rich and powerful of the West. The obsessed and the truly evil have no national interest above their own preservation and the exploitation of all else.

But when we observe the visible geopolitical activities of the "pro debt" sovereigns in contrast to the same activities of the "pro gold" sovereigns, it is an embarrassing comparison which only the most staunch loyalist can be blinded to - to remain stubbornly ignorant of the facts, or to prefer simply not to examine them objectively - some out of a misplaced loyalty, others out of fear, and still others out of a canine like obedience to an abusive master.

We had this type of behavior in Hitler's Fascist Germany. One would think that the lessons of the past would be useful in avoiding a repeat performance. But with the outrageous installation of neo-Nazis in the recent Ukrainian Coup, there appears to be no atrocity, past or presence, that is disgusting enough to quench the ambitions of global corporatism when fueled by the enormous capital advantage of debt-based paper "wealth" ... held as a deeply entrenched global reserve asset.

Likewise, as we reflect upon our true purpose here on earth, I hope this post will enhance your understanding of a quality that many wise men have attributed to gold, as it relates to the freedom of humanity. That is the "real move" that lies ahead.

Gold is the protector of Freedom. But only when it is "set free" to act as such.The collapse of the paper gold market, and its attendant paper wealth derivatives, will go a long way to this end.

This is the inevitable role of gold.

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