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For most of the last century the
default currency for international settlements has been the US dollar. This
has given America ultimate power over international trade. In recent months, the
US wielded this power against Iran, making life extremely difficult for all
Iranians. Importantly it has interrupted oil trade with India, China and
Japan. Furthermore SWIFT, the Belgian-based international banking settlement
agency, has halted all Iranian interbank transfers.
The sharp lesson for nations in
Asia is that their own trade security is best served by having an alternative
settlement medium to the dollar and other Western currencies. This function
historically belongs to gold, but that is a last resort for central banks,
and besides, many Asian central banks are gold-poor. This plays into
China’s hands.
China is increasingly keen to
provide her own currency for trade settlement purposes. She sees the
dollar-monopoly as an important security threat, which is why she has in the
past sought alternatives. She is now cautiously promoting her own currency
for this role and is developing an offshore renminbi
capital market in Hong Kong. At the same time she is evolving from
manufacturing consumer goods towards capital goods, for which Hong Kong is
the natural financing centre.
Her targeted growth-markets are
other rapidly developing economies, as well as the whole Asian continent, and
no longer the US and Europe. One of her key strategies through the Shanghai
Cooperation Organisation is to build a pan-Asian
security and trade bloc in partnership with Russia, and the last element of
this 10-year old plan is to settle cross-border trade without using the
West’s financial system. China expects to play a major part with her
currency, which explains why she is adding to her gold reserves. The
relevance of gold is that China will have to show to the people of Asia that
her currency has better long-term prospects than the dollar, which goes some
way to explaining why so many of the countries associated with the SCO are
now also accumulating the metal. This analysis is confirmed by a leaked cable
from the US Embassy in Beijing as long ago as April 2009 that can be seen in
GATA’s database. As Iran and India also have SCO Observer status they are part of
China’s grand strategy, and they have also
been buying gold.
At some stage China will need to
restate her gold reserves, and given this has to be credible rather that
actual, she will probably release a suitable figure showing her to be the
second largest holder behind the US. However, she is treading carefully,
because she has to extricate herself from monetary relationships with the
West, which ideally should be a gradual process: a sudden withdrawal could
lead to a global systemic collapse and undermine her own dollar investments.
The question now arises as to
whether an escalation of US pressure on Iran and her oil-trading partners
will provoke an announcement from China about her gold. In any event there is
bound to be a growing realisation of why gold is
central to the economic futures of China, Russia and the whole of Asia.
China’s financial and economic objectives will completely wrong-foot
the major central banks that are committed to the demonetisation
of gold.
Credit : Goldmoney
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