What's this?

Richard Russell
Dow Theory Letters snippet
Apr 20, 2009

April 17, 2009 -- What's this? The Financial Chronicle reports that China and India want the IMF to sell its entire holdings of gold to raise money for funding poor nations (yeah, since when have China and Russia [India?] been worried about poor nations?). The IMF has gold holdings of about $100 billion.

A very small part of China's reserves is in gold. It's obvious that China wants fewer dollars and more gold. If China went into the open market for gold, they would probably drive the price of gold up to $2,000 an ounce. My bet is that China would like to take in the whole $100 billion of the IMF's gold. And they're working on it.

"'We have been discussing with China a common position on the subject,' a senior finance ministry official told Financial Chronicle. Both [Indian] prime minister Manmohan Singh and Chinese president Hu Jintao will have to clear the proposal before the representatives of the two countries can take it up at the IMF spring meeting in June in Washington."

Russell Comment -- China has been on a round-the-world collecting binge, buying up all sorts of reserves and businesses. Why would gold be any different? Clearly, China wants to be one of the most powerful nations in the world, and now they have the money to do it (and they're building the high-tech military to do it, particularly their navy).

For your interest, below is a partial list of nations with their gold holdings as a percentage of their reserves. Note that China has less than 1% of its reserves in gold.

I've said before that the Achilles Heel of the US is the reserve status of the dollar. This is what Russia, China and others (maybe Europe) are chipping away at. Harry Schultz writes this in his latest mailing:

"The history of reserve currencies reveals that the position of a country as a superpower (whose currency acts as a reserve currency) tends to rotate in a natural cycle of around 100 years. Will history repeat? From 1450 to 1530 it was Portuguese (80 years). From 1530 to 1640 (110 years) it was Spanish. From 1640 to 1720 (80 years) it was Dutch. From 1720 to 1815 (95 years) it was French. From 1815 to 1920 (105 years) it was British. And then the US dollar gradually dominated the scene until 2009 of a period of 89 years."

Now the reserve status of the fiat dollar is being questioned and actually attacked. The world wants two things from the US -- it wants the US's help, and it wants US power off its back. Russia and China want to be the new world leaders, and the US with its powerful military is in its way. China knows that the nation with the gold and the nation with the strongest currency will be the world leader. My question -- will we see a gold-backed Chinese yuan? I think we may. China, by the way, is now the world's leading producer of gold.

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Richard Russell
website: Dow Theory Letters
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