The Global Monetary System,
Gold & Oil -1971 until the future
Part 2 - The rise of Gold
[and China] - The fall of the Dollar
Julian D.W.
Phillips
March 31, 2006
"The times
they are a-changing."
In the first part
of this article we covered the history of gold from 1971 onwards.
The discrediting of gold accompanied the rise of the $ to the
almost sole global reserve currency. The Central Bank sales right
up to the low point of the gold price, the "Brown Bottom"
was followed by the turn around until today's storming price
rise a prelude to new highs eventually. The final part of this
three part series will cover the Devaluation of the $ and the
future of gold. But in this second part we cover the present
and the future of the $ gold and in part oil.
It seems that things change,
always, continually. And today it continues with the arrival
of two global commercial powers onto the global monetary scene,
China and India, representing over half the globe's population.
Their development is nothing short of meteoric! But neither of
their currencies, the Yuan and the Rupee, have a global presence,
nor do they have financial systems that could be regarded as
developed, by Western standards.
But both nations have arrived
with features that are challenging the present world monetary
order. Their threat comes from their ability to manufacture all
things, far cheaper and just as well as the West can. And one
of the mainstays of a Capitalist world is competition! So we
are seeing a seemingly unstoppable transfer of wealth and manufacturing
power to the East.
But of far greater importance
is the fact that the two huge nations are absorbing resources
from oil through the commodities to an ever-growing pile of U.S.
dollars. There simply are not enough resources to go around.
After all, if rising prices do not result in rising supplies
quickly, where will prices go? And what will nations do if they
don't get enough, particularly of oil?
China & the
$!
As China arrives
on the global scene, not dependent on any other nation, nor controlled
by any, it has some basic decisions to make for its own future.
It can bow its head and fit in or develop pragmatically in the
face of a crowded globe. One of the basic decisions it has to
take is, will it accept U.S.$ hegemony? After all Europe has?
Will the other newcomer India accept rule by the U.S.$?
We believe India will, quite
happily, because of its very nature. India's government does
not have or envisage the same sort of control over its people
or geography as is needed to pose any threat to the West. It
is happy to be a fellow traveler.
But China is a different kettle
of fish. China, from a base of tight Central government control
over the far reaches of its nation, is capable of growing to
be the largest economic power on earth and is rapidly headed
that way. It's simply a matter of time before it gets there.
The cohesion of government and economy is stronger than anything
in the developed West, so it alone will decide for itself how
to manage its currency despite angry calls for a revaluation
from the U.S. More than that, it has an undeveloped currency
that it intends to keep for internal use only [as far as is possible]
for as long as possible. While it grows it's gathering a commercial
empire of other Eastern nations who are becoming more and more
dependent on its phenomenal growth.
Any development of any system
or even integration with the present developed world will have
to be on its terms, in its interests and with its objectives
in mind. Inevitably, at some stage this will bring it head on
with the U.S.$.
The government of China does
not require a U.S. style of monetary system, exercising, as it
does, control through a firm political grip on all the systems
in that country. That their monetary system should rely on so
developed and powerful a set of banks has to be unacceptable
to China as it represents a loss of Central control. Consequently
the Chinese banking system is archaic and inadequate compared
to Western Banking, but this is not a critical shortfall. Inherently
the Chinese are thrifty as they show through their very high
savings rate, enormous compared to the U.S. [and its dependence
on debt - unthinkable in the East]. This alone makes for a healthy
financial base. And this is not lost on the Chinese government,
which will harness those savings for the benefit of the nation
alone.
Confirming this, the latest
announcements tell us that China is to add 650 tonnes of gold
to its reserves, to permit Chinese citizens to use $ accounts
to trade in gold and to permit massive direct investment overseas
to use its $ surpluses more productively, whilst converting them
from dollars to assets. But the gold feature of these changes
is not a true liberalising of the gold market across China, but
only the new rich, [close to government?] who will cooperate
in supporting national interests, will benefit from these changes.
These changes are designed to lower the risk of too high a level
of U.S. dollars in their reserves and turn them to non-$ assets,
with a far lower vulnerability to the $ and directly contributing
to the sustainable financial health of China!
With growth in double-digit
levels and likely to continue that way, against U.S. growth only
a third of that of China, China is racing to first place on the
global GDP table. India with far less governmental and banking
control over its population is growing at a less dynamic rate
but still more than twice the U.S. rate. Between the two of them
the shifting balance of commercial and financial power is altering
the global balance of power steadily already.
This will have deep consequences
for the tranquillity of the present system and the U.S.$! In
turn it will result in a running gold price as individuals, institutions
as more Central Banks keep a good grip on the gold they have
with the probability of more Central Banks buying more gold.
The Chinese and
Indian Gold markets.
Until now the Bank
of China has a poor 600 tonnes of gold [1.74% of reserves] in
its reserves.
It has been claiming that it
is liberalizing the gold market in China but we do not accept
that it has done so yet. It is opening up gold to the wealthy
few in the main centers but not across the breadth of China,
for the premiums on the gold price rise sharply the further you
move away from Shanghai or Hong Kong. We would rate it a very
underdeveloped and likely to stay that way. Talk of Chinese demand
growing to thousands of tonnes is unlikely, until gold prices
are the same in the outer reaches of China as they are in the
capital cities.
Nor does the Reserve Bank of
India with gold reserves of just under 358 tonnes of gold in
their reserves represent a major holder of gold but hiding the
fact that India is the most mature gold market on the globe.
With an alternative gold based
[together with "Black" money] banking system that Western
style banking and government control finds nearly impossible
to penetrate, effectively. It is estimated that Indians have
up to 20,000 tonnes of gold secured in hidden places across the
length and breadth of the Indian sub-continent. But this is well
placed beyond the reaches of government regulators or banking
control.
China is likely to increase
its gold holdings at individual levels whereas in India, if prices
keep running the way they are may well produce a dishoarding
of gold and its export, despite the government requirement that
proof of the 8% Import Duty is produced, a major obstacle to
date.
Read Part 1
- The
rise of the Dollar - The fall of Gold
Part 3 [to
be published shortly] - "The Future of Gold and the Devaluation
of the Dollar".
March 2006
-Julian
D.W. Phillips
email: gold-authenticmoney@iafrica.com
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