In a continuation of yesterday’s piece, I’d like to comment on an article that came out yesterday. Clearly the Chinese are moving toward making the Yuan a truly international currency. They have set up “swap facilities” with over 20 nations, have the largest foreign reserves held of any nation and are now settling 17% of their own trade in Yuan as opposed to only 1% back in 2010.
The “globalness” of the Yuan is still surely in its infancy but make no mistake, China is working and moving towards a currency that spans the globe. Can they actually become “the” world’s reserve currency? As I said, the Yuan is still quite early in its growth process but…maybe by default it will have to grow up overnight. This is where what I wrote about yesterday comes in, they have accumulated GOLD…and lots of it. Should the reality be that China has in fact accumulated over 5,000 tons (and maybe more) and the U.S. is found out to have squandered its gold, the baton could be passed from the dollar to the Yuan by default (pun intended).
Would the Chinese actually want this? Hard to say in the immediate but long term I certainly believe yes. Would they accept the honor of “seignorage” and all the responsibilities and benefits that go along with it? Probably so. Are they ready to do this now, right now? Probably not but they may have no choice were a derivatives/debt meltdown begin. “Could” they become the reserve currency of the world with or without a financial crisis? Without a crisis mode I doubt that they would rock the boat and will continue to accumulate more foreign reserves and gold for as long as they can. During a crisis they may not have a choice. During a crisis the rest of the world may actually request this of China because it is known that they in fact do have the boatload of foreign reserves and gold.
I would also like to mention that when I use the word “crisis,” it isn’t necessarily what first comes to your mind. Yes, the end result or the “process” of a crisis is exactly what you are envisioning, the cause however may not be. Who could have foreseen the Archduke Ferdinand assassination as being the cause for an entire world to go to war for example? I want to focus on “cause” for a moment so you’ll see where I am going with this. It is my belief that the supply of gold is running out at the current rate of demand. This very well could happen before year end if you look at COMEX contracts that have stood for delivery versus inventory and the lack of actual metal leaving the vaults for some contracts going back several months. December could actually become a deal breaker.
So what does “gold” (or silver) have to do with “cause” of a financial crisis? Simple, if all of a sudden metal does not get delivered then the entire game will change. Were China to be told, “Sorry, we cannot take your order because we already shipped you the last ounces,” what do you suppose their response would be? Maybe something like “then what good are these dollars if we can’t spend them?” My point is this, the gold market and particularly silver markets are incredibly small in comparison to the trillions of dollars traded and “valued” in the global paper markets, however, a “non” delivery default will upset every market everywhere on the planet. “Non delivery” which would only directly affect the party not delivered to… will actually end up affecting everyone, everywhere because “trust” will have been broken. Confidence will simply evaporate.
So why did I get off of the subject of China/reserve currency? I didn’t, if China is told that there is no more gold to be had, yes a “crisis” will evolve…BUT more importantly it will open the door to China’s Yuan to ascend. Foreign nations will call for China to step up because it is known that “they have the gold.” China at this point in time (since they cannot accumulate any more gold in size) will themselves “re mark” the price of gold. This will easily be done as it’s in line with Mother Nature’s push and justified (in dollar terms) based on how much credit has been used by the U.S. Besides, at that point why wouldn’t China or anyone else holding gold want it to be “valued” higher? This is a “natural” and even though I don’t believe the Chinese is ready for this yet; I think they will react rationally to the reality “when” at some point their dollar holdings cannot be turned into gold in size.