Alasdair Macleod has posted an article at www.goldmoney.com which I think
is important.
(See "Credit deflation and gold".
www.goldmoney.com/research/analysis.)
The thrust of this article is that China will at some point have to
revalue gold in China; which means, in other words, that China will decide to
devalue the Yuan against gold.
Since "mainstream economics" holds that gold is no longer
important in world business, such a measure might be held as simply
idiosyncratic of peculiar Chinese thinking, and not politically significant,
as would be a devaluation against the dollar, which is a no-no amongst the
Central Bank community of the world.
However, as I understand the measure, it would be indeed world-shaking.
Here's how I see it:
Currently, the price of an ounce of gold in Shanghai is roughly 6.20 Yuan
x $1084 Dollars = 6,721 Yuan.
Now suppose that China decides to revalue gold in China to 11,924 Yuan per
ounce. (Of course, the revaluation might not be as great; I use the figure
simply to illustrate consequences.)
What would have to happen?
Importers around the world would immediately purchase physical gold
at $1,084 Dollars an ounce, and ship it to Shanghai, where they would sell it
for 11,924 Yuan, where the price was formerly 6,721 Yuan.
The Chinese economy operates in Yuan and prices there would not be
affected - at least not immediately - by the devaluation of the Yuan against
gold.
Importers of Chinese goods would then be able to purchase 77% more goods
for the same amount of Dollars they were paying before the devaluation of the
Yuan against gold. What importer of Chinese goods could resist the temptation
to purchase goods now so much cheaper? China would then consolidate its
position as a great manufacturing power. Its languishing economy would
recuperate spectacularly.
The purchase of physical gold would take off, no longer the activity of
detested "gold-bugs", but an activity linked to making money, albeit
fiat money. Inevitably, the price of physical gold in Dollars would separate
from the price of the "paper gold" traded on Comex and go higher,
leaving paper gold way behind in price.
One way that the rise in the price of physical gold could be prevented,
would be for the US to provide the physical gold in the quantities being
purchased for trade with China, but since we know that Comex has only one
ounce of physical gold for every 124 owners of paper gold, that would be
impossible. China would be sucking up the world's gold at a huge rate, if the
price of gold in Dollars were to remain where it is at present.
Another way that the US could counter the Chinese move, would be to
revalue gold in dollars; which is to say, the US would have to effect a
corresponding devaluation of the dollar against gold, to nullify the effect
of the Chinese devaluation of the Yuan against gold.
At a dollar price of gold of $1,923 Dollars per ounce, the Chinese
devaluation would be left without effect: the present Yuan/Dollar exchange
rate would then remain at 6.20 Yuan per Dollar: 11,924 Yuan/6.20 exchange
rate = $1923 Dollars per ounce.
This is the old policy of the 1930's, commonly known as "beggar thy
neighbor", where countries carried out competitive devaluations against
gold in order to preserve their manufactures and continue exporting. The
response of importing nations was to raise tariffs on imported goods. (Say
good-bye to an integrated world economy.)
Will China decide to "beggar its neighbor", the US and Europe? I
think that the huge problem of keeping the Chinese economy on its feet and
avoiding the political instability which would rage through China by not
doing so - with a population in excess of 1.3 billion human beings - will be
so compelling that China will practically inevitably resort to raising the
price of Yuan in China.
When might this happen? The world economy is going from bad to worse by
the day. The Chinese may opt for this measure out of sheer desperation, and
it may be a reality soon. I have the sensation that things are falling apart
around the world at an increasing rate of speed. Perhaps we can
expect China to move this Fall.
Devaluing the Dollar on the part of the US would upset the apple-cart of
Dollar hegemony in the world. But not to devalue would price US goods out of
world markets, along with European goods. Damned if you do, damned if you
don't.
Dollar devaluation would force a Euro devaluation and all Hell would break
lose, as all countries would belatedly realize the importance of having gold
reserves, and one country after another would devalue their currencies
against gold. Import tariffs and restrictions on imports would once again
prevail. The dream of "Globalization based on the fiat dollar"
would evaporate.
The era of the Dollar as reserve currency of the world, would have ended.
When the dust should have settled on this giant crisis, the world would be
back on a de facto gold standard, and on the way to establishing it de
jure by international accords, in order to abolish tariffs and import
restrictions and renew the free international flow of goods.
However, another horrible scenario is possible: the US, run by those who
insist on maintaining the plan for world domination through endless war, may
decide to go to war with China and with Russia, too, for good measure. Let us
hope that reason prevails and that the Dollar loses its status as world
reserve currency in a peaceful manner.
