As an addendum to yesterday’s writing, today we should tie together the new alliances and what appears to be Western defections toward the East. Just overnight, Australia also applied for membership to the AIIB, a U.S. rebuke is sure to follow, who is next? With this in mind, it is my belief the Chinese will be the key player in the gold market and the “pricing” of gold in the future. In turn they will gain even more financial strength because of the massive amounts they have already accumulated. As a side note, do you believe it is by mistake China is now the largest gold producer in the world? I think not. I will give you my theory first, then work my way toward supporting it.
Very simply, I believe China will fare poorly when the paper and derivatives markets around the world collapse. They have a very over levered real estate market to which many of their banks and “shadow banks” have lent to and have exposure. Their real economy and manufacturing will suffer as global demand drops further because of economic depression. It won’t be “pretty” but they will survive and eventually thrive. Why? Because undoubtedly, China is working toward the yuan becoming “a” reserve currency and given time, “the” reserve currency. My theory is this, China, even though they are probably willing and plan to eventually re mark gold much higher than where it trades today, will be FORCED to mark gold higher to re liquefy or re capitalize their banking system. This is not groundbreaking thought as gold has been marked higher in past monetary episodes in order to re capitalize treasuries and banking systems. It also had the side effects of generating some inflation and kick starting the economy. It is in a parallel fashion to this which I believe China will ultimately be forced into.
As you know, Britain (and Australia) has applied to become a charter member of the AIIB. No matter what is given as reason, this is simply their recognition of where the future is headed and the Brits wanting to be allied with the winner in a “if you can’t beat ’em, join ’em” type of move. Britain must first clear the hurdle of being accepted. China has introduced them but they must be ratified by the various founding countries. I find this intriguing because of the potential motivations for either a yes or a no vote. Does Britain bring much to the table other than reputation or the fact they are the number one U.S. ally changing their allegiance? If Britain is accepted, they will merely be a “feather” in the East’s cap. A no vote would be quite embarrassing because Britain has now shown their hand and intent, …only deemed to be “not good enough”? A very bad place to be if you asked me.
Why am I even bringing Britain’s application up? Because I believe it is a timing thing. The East, obviously led by China is beginning a new “fix” to challenge London’s and they are also beginning a new cash and carry metals exchange which will challenge COMEX and LBMA. Maybe “challenge” is the wrong the word. Better said would be to make these two exchanges “obsolete”. What will happen if (when) China’s physical exchange prices metal higher than the paper exchanges? “Arbitrage” will happen and the Western vaults will be cleaned out, that’s what! I hate to state the obvious but how do you have a “business”, in this case an exchange, if you have no product? For Britain to make application now and against direct “orders” from the U.S., at this point in time, tells me something is changing and it may now be coming to a head.
Whether or not the timing of the East beginning new exchanges and pricing, along with their own alternate clearing system and global bank is “cause” can be debated. Have they timed it with the demise of the over leveraged system of the West? Or will the alternative systems themselves pull the rug out from under the dollar and all that goes with it? It really does not matter. As I wrote above, China will not go unscathed and will be defaulted on in many instances and will also watch as much of their internal leverage defaults.
It is the nature of defaults that leads me to my theory of China revaluing gold higher whether they want to or not. It will be their natural, if not ONLY choice. I don’t believe they will have any other choice even though they have been preparing for many years, simply because they have played and are playing in the paper game. They have built a manufacturing base the Rockefellers, Vanderbilts and Fords would marvel at in both size and technology. They have built new infrastructure and even new cities preparing for “something”. During this “build out”, China has also amassed more gold than the U.S. even claims to have. It is my contention China has done all of this because they understand the end game. They understand the dollar game fully. They have known ever since and even before 1971 the rules were “never pay” or settle as the key component.
Think this through, clearly default of nearly everything paper is coming. If you don’t agree with this or cannot see it then my theory is useless to you. If you can see this, and the Chinese surely do based on their actions, what is the plan? Just as has always been done in the past many times, their “treasury” will require a MUCH higher gold price to rebuild their base from. With much of everything paper defaulted on (and including “to” the Chinese), there will by necessity need to be a restart button pushed. China’s gold will serve this function. As with Exter’s pyramid I recently showed you, a new pyramid will begin to build …using China’s gold as a foundation.
Revaluing their gold hoard has many advantages and zero disadvantages as I see it. Their treasury coffers will swell, their currency will begin to enjoy the fruits of reserve status and along with this, they will enjoy new found power. We will witness not only the greatest transfer of wealth in all of history, along with this will come a transfer of power, financial power. When China revalues gold higher, this will serve several functions beyond the obvious of devaluing their currency against it. For those countries not holding gold, a very long and arduous financial time will follow. By marking the price up, they will be making any accumulation or “catch up” plans very difficult. Another aspect is from the very micro standpoint of gold being priced too high for the average citizen to buy much if any. For China to do this makes perfect sense. They take the lead and the power while making it difficult for anyone to catch up to them for possibly several hundred years …which is exactly how they think. The West has clearly forgotten the old saying about gold and those making the rules, I believe China will be forced to invoke it!
Bill…Your theory is very likely something close to what will eventually come to pass.
The East moves in deliberate moves.. They understand delayed gratification.
The West tends to move with only immediate returns on investment so to speak.
The World has many troubles but just like those of us here that are preparing for difficult times, some countries like China are preparing to EMERGE stronger.
Countries that are able to remove themselves from the burden of debt are likely going to be able to thread water better as they work their way back to financial health.
As we have said here many times. Debt must either be paid or defaulted upon. Either scenario will cause us pain Worldwide.
Nobody will avoid the pain of a reset. The question is preparing survival of the reset.
Thanks to people like Bill and Andy we have a better understanding of the potential direction things take.
the West reacts while the East anticipates.
Good Morning Bill, a must read:
https://www.facebook.com/derrickmichael.reid/posts/1627886797440047
thanks Derrick.
In the end both East and West will need to return to sound money principles.
Fiat is fundamentally wrong and only value backed paper money can survive longer term.
Gold is very limited and that scarcity makes it a workable solution to bringing back confidence to the NEXT reserve currency.
History has made it very clear….Gold and Silver is real money.
Those of us that do not hold enough of it to insure our buying power will be faced with a very unpleasant reality soon.
led by the East.
Bill,
Great insight as always. My question is regarding the timing of a gold reset. If China knows this is the end game (and I am in agreement here), wouldn’t they buy up cheap gold mining shares with all of their excess fiat currency prior to any reset?
I know they have bought much in Africa and have bought much infrastructure / RE / businesses on other continents but have not seen stories of them buying larger gold miners in North / South America.
Thanks, Scot
maybe they are afraid of nationalization? Remember 10-12 years ago when they wanted to buy Unocal and were told no because of national security reasons?
… its sound so true, but on the other hand. …
if I imagine once gold gets valued up so much, would mean my poor thai family will be rich as they stock gold and landss like crazy, and this for years …??!
Just cant imagine …
so few people own precious metals, the majority will be blind sided.
All those poor Indians will become rich
yes.
I have a dumb question. What is AIIB?
Is it the clearing system you wrote about yesterday?
A commodities exchange?
A trade union?
Thanks. I have a hard time with so many acronyms.
http://news.yahoo.com/france-germany-italy-join-china-led-infrastructure-bank-113711893.html;_ylt=A0LEVylMaQhVh80AWzxXNyoA;_ylu=X3oDMTEzM2IxbTdwBGNvbG8DYmYxBHBvcwMxBHZ0aWQDVklQNTc3XzEEc2VjA3Nj (Asian Infrastructure Investment Bank)
Germany, Italy and France have joined, I mis wrote earlier.
The only question (per Freegold paradigm) is what be the True Price of gold in various currencies? For example, USD – will it be $50k/oz or $200k/oz, or $1M/oz, or $1M per gram! China only has to declare a BID Price that is very high, and everyone else will re-price to that New Value!
…and thus filling the black holes of a deflated fiat currency.
Oh-ho! “…a potential rival to… the WORLD BANK!
Zowie!
yes, exactly.
Bill, your theory may very well come to pass. However, I’m fully convinced that the Chinese will not move unilaterally on this. It will be a very deliberate, well thought out action, that’s taken in conjunction with other countries.
Any country that “owns” the reserve currency faces a conflict between domestic economic policy and international objectives. This is well known as the “Triffen Dilemma”. Essentially, they must be willing to supply the world with an extra supply of their currency to act as other’s reserves, thus leading to a domestic trade deficit. Facing a paradox because it is not possible to run a balance of payments current account deficit and a surplus at the same time.
The Chinese are fully cognisant of this paradox, as eluded to by the People’s Bank of China governor, Zhou Xiaochuan, in a speech of March29, 2009 titled “Reform the International Monetary System”. As a result the Chinese will attempt to avoid the pitfalls of the “Triffin Dilemma” and move forward with partners willing to share the burden. The ultimate outcome of course being the demise of the US dollar as the worlds reserve currency.
yes, but they will lead.
OLI, I don’t think the Chinese have to “DO” anything. All they have to do is wait for the USD to collapse under its own weight. In the meantime, they can prepare by buying real assets and making global alliances.
Creating exchanges to compete with the Crimex and the equally criminal LBMA just makes good sense. The corrupt USFed has already shown they will spend what ever paper assets they have to save the bond market. So even if the Chinese dumped all their treasuries, the Fed would just soak them up with pretend dollars.
Not so with the PM market. As Bill presciently stated, arbitrage would shut the two government-sanctioned criminal enterprises down in less than a month (maybe sooner, I’m not certain about the delivery rules).
that’s the problem with gold, at some point there must be some real stuff involved.
Bill, I do have a question about the arbitrage specifics, though. What if the Comex settles in paper and the Chinese-backed exchange requires physical. Doesn’t that put the arbitrageurs out of business?
no, those who sold paper would be required to deliver physical. If they cannot deliver…the paper pushers are then out of business.
Ok, taking this arbitrage 1 step further:
What if the arbitrage demands physical, and whoever is running COMEX doesn’t settle with paper but delivers physical instead? A physical submarine, naval destroyer and a nuclear weapon, that is?
This was my point. I don’t really understand “settle with paper”?
Excellent article, again, Bill.
I just wanted to clarify an opinion on the effect of an economic downturn on China. They have been selling to the world in order to get the “chops” to build their manufacturing/production infrastructure to a point where they can turn it inward to their own country/markets. 1.2 billion (and growing) customers that would prefer to buy “Chinese” is a market any capitalist would sell his grandmother for (exaggeration for the sake of emphasis).
This alone will give China an ability to “weather” the world economic collapse better than the rest of us. (AJMHO)
the same could have been said about the U.S. in the early 1930’s.
I think it is unrealistic to believe that the USA has the internal fortitude to swallow their pride and admit their mistakes.
For that reason they will look to blame it on someone else.
My hope is the world powers realize that the game is about to change and it is time to fix what is broken. In time the USA comes back to the table and excepts their new place in the world order.
Problem is the population that for the most part has been asleep either voluntarily or by design. They will riot in the streets when the truth comes out that the free lunch is over.
The result of default on debt will not be pretty.
Whatever happens, a new form of money backed with something real has to be part of the answer moving forward.
What that does to the price of PMs only time will tell.
Time seems to be short.
problem is, this is the stuff wars are made of.
Bill, You only comment on charts when you see bottoming action. What about the charts now? I have to say it is 50 50 chance of 1000 gold or lower coming if these levels do not hold. The charts just look horrid especially with a fed meeting tomorrow. Off subject, something I blame myself for is not following is gold production, as it has not yet turned down. Way to many people were implying production had gone down years ago when in fact it was increasing!!
Bottom line is, Is everyone mentally prepared for a possible washout to levels no one thought possible? The junior gold miners are acting like a washout is coming. Note, I am not bearish on gold except for probable near term action which will as all washouts do, scare many people out. Miles Franklin should notice massive sell backs if this would occur. Human nature will never change.
not looking at monthly charts, rather they look washed out but you are correct a washout could occur. You are however only looking at dollar charts, gold and even silver are in bull markets in most all other currencies. Production peaked and has leveled off over the past few years …AND companies have been high grading again.
totally agree on the high grading, but still 2014 was a record production year (and finally I agree peak production has occurred, still open for the peak this year). As far as gold in other currencies, I do not think most Americans could care, they only look at it in USD and it is down 40% in three and half years!! Markets can be so cruel!! Timing has been and always will be worth a lot. Even look at Jim Sinclair and his company. He is literally on the edge of you know what.
they are not markets, they are manipulations. If you cannot see this then I cannot help. Do you truly believe we have free and fair markets?
Bill, I did not ask for or need help (we are so close in views). I mentioned most Americans, not myself. However, by your response I can see even you are getting agitated with the manipulated price action. I guess my response is also showing agitation. Jim Sinclair is a hero of both of us, and I just mentioned his company is on the brink, but I really hope that he can recover from what looks like a bad situation. Gold bottoming right here, or a day or two of washout with the bottom in place would be nice for all concerned. You are scaring me with this talk of manipulation, because what is the bottom then? Peace Be With You
I have written about manipulation for years. You and I apparently don’t play well together so I won’t.
It’s good Sinclair’s bunker has a multi thousand gallon tank of diesel rather than gasoline, I wonder how long diesel lasts…
Hi Bill,
These articles that you write that uses good old common sense – or as a friend of mine calls it, “good old common horse sense” are my favorite. I really believe that, especially in today’s world, good old common horse sense if far more valuable than all of the data analysis that the entire world could do. Mainly because the data points are just not good.
Blessings,
Bob
thanks and bless you too!
History tells us that previous wars have started over less.
There is no simple answer.
That is why I believe it will get VERY ugly.
Will we have managed chaos or will this simply spiral out of control……
Time for leaders all over the world to earn their pay.
Hi Bill,
I avidly read your stuff – it really helps with seeing the big picture.
Here is why the Brits are relevant to China
http://www.newstatesman.com/economy/2011/02/london-corporation-city
also deals were done in returning Hong Kong I believe.
Just some thoughts in return !
All the best, NG
yes.
Bill you know, and Alisdair MacMcLeod recently highlighted in some detail, that China’s gold strategy goes way back in time. Alisdair wrote that China took steps with the view of eventually dominating the gold market as far back as 1983. Then in 2002 Chinese leadership allowed, and started promoting, private ownership of gold which goes hand in glove with the cultural and traditional affinity the Chinese have for gold. Think Chinese New Year for example. It is therefor not inconceivable many Chinese own some gold coins and jewelry.
Now consider that China, like most of the rest of the world is in economic doldrums. The western consumer is tapped out and not buying Chinese goods the way they were when times were good.
Do you suppose China would welcome increased domestic consumption? For that the Chinese would need increased wealth to translate into increased consumption to offset the current economic slump and potential looming financial collapse of the West. But wait, a higher gold price would help make the Chinese wealthier and increase domestic consumption.
Do you think Chinese policy makers might have envisioned this as part of the plan? Now that surely would be a testimony to forward thinking!
mark in Victoria BC
absolutely.
Bill is it just me a part time economist hack really or is no really understanding what it meant on the 13.03.15 to have the BOE want to join the Chinese Bank ( lets be honest that’s what it is) In one swoop the BOE has given away all of its power as the main contributor to the bank (china) has almost all of the rights, of veto as main contributor, So basically the BOE has just given away its sovereignty to the Chinese, it is actually written like this in the article issued about this by the BBC, but it did not raise one alarm bell! Also being an Aussie it is now completely obvious that we have sold all of our country to China via The recent completely biased to the Chinese trade deal that was literally railroaded through parliament here, and now we are giving them or money, why, why , why is no one saying any thing at all about this anywhere!???
Australia has done the same thing.
Bill – thanks for the article. Can you briefly explain what “Arbitrage” means in the gold markets?
if paper contracts proclaim gold lower than the physical markets, buyers will naturally gravitate toward the paper and demand delivery.
Hummm,,,,and I always wondered why end times Prophecy looks more to the East than the West.
Actually, The King of the East is last part of the grand finale. End times prophecy focuses mostly on The King of the West (the Antichrist).
would like to know who that is?
If it is an “is” and not a “will be” then it makes little difference who owns the gold.
yes, I understand and agree fully!
I agree also
Just one more note. There is a Biblical period called the “Shemitah” (Sabbatical year) which was practiced by ancient Israel. It represents 7 year cycles of debt release. The world is not immune to this principle. The next one due is Elul 29, or September 13, 2015. The last one occurred during the 2008 crash. The one coming should be a real doozy because it will coincide with the Hebrew Year of Jubilee in 2016 (it occurs every 50 years). 2015 and 2016 should be full of economic and other fireworks in the world. Bill’s articles are consistent with the Hebrew calendar and Biblical principles.