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Julian  D. W. Phillips

Julian D. W. Phillips

Global Watch: The Gold Forecaster covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a…

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The Global Monetary System, Gold & Oil -1971 until the future: Part 2

The rise of Gold [and China] - The fall of the Dollar

"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.

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