“We need to secure our gold and currency reserves,” these words were recently spoken by Vladimir Putin. What do they mean? Why would he say this? Isn’t it obvious that you would want to protect your gold? What would prompt him to even mention gold or currency reserves … and why now?
To answer some of these questions, first let me take you back about 10 years or so, do you remember the picture of Mr. Putin holding a very large, bright and shiny gold bar? If you sit and ponder this just a bit, I’ll bet you can figure out what that photo op was all about. You see, Mr. Putin amongst many other talents is a great mind and a strategic chess player. He knew. He knew back then that the dollar did not have a long term future and that the pin on the grenade had already been pulled. That photo op was taken not because he wanted “press” coverage or because he wanted to be seen with wealth in my opinion, no, he was sending a message which is exactly what I believe he is doing again.
If you recall, Austria is now requesting that they be allowed to audit their gold holdings in London. Germany did the same with the FRBNY over a year ago with less “luck.” Mr. Putin has seen this and he can also do math (as can the Chinese). He knows that more gold has “moved” in recent years than could possibly be; unless some of it came from Western vaults. Putting 2+2 together, Mr. Putin, the Chinese and apparently the Germans and Austrians are wondering where all of this gold has come from. OK, so I’m being nice, they know “approximately” where it came from; in the case of the Germans and Austrians they are hoping that none of it has come from their stacks.
Yes, Mr. Putin is stating the obvious here because he does not want Russia’s “currency reserves” to be held hostage in the sanctions game. This would explain the large $100 billion drawdown of FRBNY held treasuries back in March. Russia moved the treasuries out and is in the process of liquidating them while purchasing gold with a small part of the proceeds (900,000 ounces last month) so far.
As for the “gold part” of his statement, I think he is just drawing some attention to the current sentiment that is beginning to question who has what and where. I think he is also drawing attention by putting the two (gold and currency reserves) together in the same sentence. I would not be shocked if we soon see a joint Russian Chinese statement that “gold” will be a part of their energy deal. Do you think Mr. Putin wants to ship oil and gas to China for pieces of pretty inked paper that have no real value? Hasn’t he already seen the Saudis do this for some 40 years now while depleting there in ground reserves?
I have thought for some time now that China would do some sort of gold backing to the Yuan. After thinking this through further, I truly believe that “backing the Yuan” was a part and parcel of the deal between Russia and China but has not been announced yet. This surely must have been discussed and probably quite some time ago. This makes sense to me as Russia will now have a steady and guaranteed outlet for their product and the income from it. China on the other hand will receive energy to fuel their economy and a source of “demand” for their “petro Yuan.” Do you see where this goes? This is VERY similar to the petrodollar deal that we did with Saudi Arabia 40 years ago with one little difference…gold!
Think about the forethought here. Russia has been buying gold and China has been gobbling gold up as fast as it could be humanly refined and shipped. They have not yet made any announcement on how much their reserves have grown to but I would imagine that an announcement will come shortly. If I had to guess, we will hear a grand announcement that solidifies the Yuan as being backed by a ratio to gold and they will also announce a “price” that gold will be pegged at.
Scoff at this if you will, the U.S. “revalued” gold upwards by 75% to $35 in 1933 and then 11 years later along came Bretton Woods. I believe that the Chinese will follow this model but all in one step. There are many ramifications to this if it in fact does happen. I would add that I also believe the Saudis will announce that “some” of their production is going to be contracted to China, another “support” to the petro Yuan. You must also ask yourself why Exxon and BP have just inked new energy contracts with Russia in the face of and contrary to U.S. sanctions. Could it be that they also understand that the current “something for nothing” dollars for oil is not fair or equitable?
Getting back to ramifications, what will happen? My guess is that the dollar will come under some serious weakness and panic selling. We will see the derivatives monster fail and seize up with banks and brokers going upside down …or… we just have a holiday. If the Chinese unilaterally raise the price of gold (my guess would be $10,000 per ounce or higher at today’s dollar) there will be some serious problems. How would the COMEX react to this? Would they immediately claim “force majeur” and settle on the previous day’s price? Probably yes in my opinion. This would also mean that gold’s pricing mechanism has moved overseas and away from the U.S.
Some may say that this thought process is far-fetched. I don’t really think that it is. I think that this was planned out several years back and that the Chinese have been working on “cornering” the physical gold market. They allowed (or even aided) the suppression of the price of gold which aided them in making their purchases. Let me explain this a little bit because it needs it.
Do the Chinese care about “the price” of gold? I can almost assure you that they do not. Would it have made any difference if they were paying $3,000 per ounce on average instead of $1,300? No, not one bit because they are “spending” dollars and I believe they know exactly what dollars are worth. I don’t think they care one wit. But…if the price is dropping then there is no danger of a stampede for delivery. Yes there has been additional demand to purchase as a function of lower prices but there has not been any “panic” buying. I think that they fully understand “where” we are exactly and that a global financial panic can begin at any time. If this were to have occurred 2 or 3 years ago, that would have been 2,000 to 4,000 tons ago. They needed to string this thing along as far as they could until one of two things happened. Either the financial panic and thus a “run on the gold vaults” or there is no more to be delivered. Either way they accumulated as much as possible prior to re pricing the metal.
Don’t believe this if you care not to, the Chinese are very smart people and fully understand what “money” really is. They have the ability, the money, and the motive, the “everything” to pull this off. They have every reason to move along these lines, read between Mr. Putin’s lines as he is giving you some hints along the way… and he is now speaking “for” the Chinese which is a big change and one he would not make without Chinese approval.