Tag Archives: ECB

The PBOC Was Buying Gold in London In The Nineties

I couldn’t resist translating this must read from 1993 in Dutch newspaper NRC Handelsblad (h/t @frankknopers) about the gold sales by the Dutch central Bank (DNB). Presumably, “a part” of the 400 tonnes sold at the time through the Bank For International Settlements went to the Chinese central bank. Although we don’t know for sure what the Chinese central bank did with the gold – at the time the People’s Bank Of China was the primary dealer in the Chinese domestic gold market and in theory could have sold the gold to Chinese jewelry fabricators – we may assume it was kept for its official reserves.

The other week I published an article about the Chinese Gold Army that was established in 1979 to develop domestic gold mining and exploration. This signifies the People’s Bank Of China (PBOC) was laying the foundation for the Chinese gold market in the seventies. Later on, in 2002 the PBOC started to liberalize the gold market by launching the Shanghai Gold Exchange that took over gold allocation and the pricing mechanism from the central bank. Many of us thought that the PBOC only became active in the international OTC gold market to diversify its lopsided US dollar reserves after, say, 2009. But we were wrong, the PBOC was buying gold in London as early as 1992. No, we don’t know exactly how much or what they did with the gold, though for sure the PBOC has been designing its gold strategy decades ago along side its opening up policy.  

Remarkably, the article from NRC noted that the Dutch central bank sold gold “to equalize its holdings relative to other important gold holding nations” and “it’s known China is working to increase its gold reserves to bring it more in line relative to its GDP”. One of the theories about our current international monetary system – that was detached from gold in 1971 – is that it can only shift to a new gold anchored system when the power blocks have equalized the chips (Jim Rickards). In other words, if the US, Europe, Russia and China all have an equal ratio of official gold reserves to their GDP, the international monetary system could make a transition towards gold.

Global gold vs GDP

Within the aforementioned theory China should have about 6,000 tonnes to come to the gold/GDP ratio the EU and Russia have (the US has a little less gold proportionally). Although it’s impossible to know how much the PBOC really holds, it’s certainly more than what they disclose at the moment, which is 1,743 tonnes. In a forthcoming post we will discuss the most recent ins and outs regarding PBOC official gold reserves. For now, enjoy the full article.

Note, at the time the article was published DNB held 1,090 tonnes of gold.

DNB gold

Operation Gold

(NRC Handelsblad, 27 March 1993).

Last summer the President of the Dutch Central Bank, W. Duisenberg, persuaded the Minister Of Finance, W. Kok, of the need to sell a quarter of the Dutch gold reserves: “The time is right”. Part of the Dutch gold was probably sold at the end of last year to the People’s Republic Of China. The multi billion operation that has taking place in utmost secret is producing the state an annual 400 million guilders in extra benefits since 1994. “Part of the sale was handled outside the market.”

van Ewijk and L.J.R. Scholten: The profitability of De Nederlandsche Bank, in: ESB 1-7-1992. In ESB 19-8-1992 there was a sequel and in ESB 20-1-1993 both authors went on about the gold sales.

March 27, 1993

No. The gold of De Nederlandsche Bank [DNB] was not secretly loaded into a Chinese cargo plane at Schiphol and flown to Beijing. The gold of the Dutch Central Bank remained where it was, in the vaults of the Bank of England where it has been for years. Only the signs with the name of the owner of the gold bars were changed. A new name: for traders in the international gold market there is no doubt that the People’s Bank Of China (PBOC) has bought a part of the 400 tonnes of gold, a quarter of the Dutch gold reserves, which DNB has sold late last year in utmost secrecy.

“With 99 percent certainty we know that the People’s Bank of China has been one of the buyers of the Dutch gold”, said Philip Klapwijk from Goldfields Mining Services, an institute in London affiliated with the South African gold mines that specializes in research into the gold market. Also other London bullion dealers have a strong suspicion that China was involved in the gold sales of DNB. “We have noted that the Chinese central bank has bought gold in recent months”, said John Coley of the London bullion dealer Sharp Pixley and spokesman of the London Bullion Market Association.

At the Ministry of Finance in The Hague and at DNB in Amsterdam they know the story of the Chinese connection, but they remain tight lipped. “Everything is sold locally in London”, said the spokesman of DNB, JH du Marchie Sarvaas. The central bank is silent on the question of who was engaged in the sale and who the buyers were. “It is not in our interest to make announcements about it”, he said. Servaas will only tell us that the transactions have been set up in different ways and that DNB has not entered the market directly itself.

The spokesman of the Ministry of Finance, Dr. RP Florisson, stated not to know where the gold that was sold has gone. Some things, he added, you would rather not know. Members Of The House have neither any idea in what way the gold was sold. With the letter from 12 January by Kok that notified the Members Of the House about the gold sale came an attachment, though in it the ‘technical details’ from the original correspondence between Duisenberg and Kok were omitted. This was a crucial passage, which disclosed the name of the mediator in the gold sales, the Bank for International Settlements, the central bank of central banks.

BIS
Courtesy BIS.

The Seller

Perhaps the phrase “silence is golden” finds its origin in the world of central banks. Like is the case in Operation Gold. In April 1992 DNB developed the intention to sell part of its gold stock and add the proceeds to its foreign exchange reserves. The Board Of Governors of the central bank, consisting of President Dr. WF Duisenberg and three other Directors, approved the plan. Only a few other employees were notified. In June Duisenberg shared his plan with Kok during one of their weekly lunch meetings. Kok hesitated at first because he feared he would be remembered as The Seller of the national gold.

Duisenberg explained that it was the sound fiscal policies from Kok and the strong position of the guilder that made the gold sales possible. Kok was persuaded. At the Ministry Of Finance the Deputy Comptroller General and the Director were informed. On 29 September Duisenberg sent a letter to Kok in which he explained that the sale was intended ”to equalize our gold holdings relative to other important gold holding nations”. The sale should not lead to loss of confidence in the guilder, not serve to fill the state coffers and not lead to disruption of the gold market. “Therefore, a high degree of secrecy is warranted”, Duisenberg wrote. If unexpected complications would arise DNB would waive the operation.

Wim Kok China Construction Bank
Courtesy CCB. Coincidentally, the Minister Of Finance of the Netherlands, Wim Kok, in 1993 that approved the gold sale that ended up in China is now employed by China Construction Bank Corporation – the second largest bank in China after ICBC.

Kok agreed on 2 October and in the fall several sales transaction followed in the London forwards market. In addition, the Bank has for International Settlements (BIS) was involved as an intermediary. The BIS, which is based in Basel and was established in 1930 to administer the German reparations, is as closed as the Swiss banking secrecy. Who calls the BIS can enjoy the long version of Eine kleine Nachtmusik as on-hold music, to finally be told the BIS never releases any information.

Duisenberg expanded on the gold sales at a meeting of the BIS on 12 January 1993. The sale had already taken place, only the gold had yet to be delivered. Not all members of the BIS welcomed the Dutch move, nor were they consulted for its decision. That same day DNB published the news. A team from a TV news network was – under the pledge of secrecy –flown to Basel for an interview with Duisenberg. “The time is right” for the sale of part of the Dutch gold reserves, the President said.

The news dropped like a bomb. Rumors were circulating in the gold market late last year about possible Dutch gold sales, based on these rumors a reporter from news agency Reuters asked DNB for a response in November. It replied no announcements were ever made on market transactions. Gold traders were particularly surprised by the volume of sales: “It was very well done. I never knew that the market could absorb such an amount in such a short time without drastic price distortions”, said one gold dealer.

It was a huge deal. Four hundred tonnes is nearly a quarter of the total annual gold mine production. It is the equivalent to 32,000 gold bars of 12.5 Kg [400-ounce] and 26 centimeters in length, which placed end to end form of line of 8.32 kilometers. That is almost as long as the symbol of our national pride, the Oosterscheldedam.

With the sale DNB earned 7.5 billion guilders in US dollars, D-marks and Japanese yen that have been added to the foreign exchange reserves of the central bank. As these foreign exchange earn interest – unlike gold – the profit starting from 1994 is an annual 400 million guilders which will flow to the state coffers. Recent pleas from Members Of The House to invest this money in infrastructure have been rejected by Kok, who agreed with DNB that this amount, like other profits of the central bank, flow to the Treasury.

Economics Journal

Seldom a critical note is written about the policy of DNB. Coincidentally, last year, while Duisenberg was preparing the gold sales in secret, a remarkable article in the journal for economists, ESB, was published. Casper van Ewijk and Bert Scholten, both working at the economics department of the University of Amsterdam, questioned the profitability of DNB. They concluded that the central bank, with its relatively large reserves of gold and foreign exchange, yields an extremely poor result on its investments. With that, the annual profit payment to the Treasury is a lot lower than possible.

In a second article – after the gold sale – the two economists claimed that DNB had sold too little gold and had waited too long with the sale. Now the gold was sold for an average of 18,800 guilders per kilo, while ten years before it could have been twice that amount. In those ten years, the gold yielded not one cent and its value only declined. The addition of the gold to the foreign exchange reserves was in their opinion, “unnecessary and therefore undesirable”, as the Netherlands has more than enough foreign exchange reserves. And the revenue of the sale, according to Van Ewijk and Scholten, could be better used to reduce the national debt. That gives the government more financial benefit than an annual interest income.

The defense of DNB – as expressed in replies from the Minister Of Finance to questions by the parliament – is that a central bank is not a hedge fund. The gold and foreign exchange reserves are not intended to maximize returns but to conduct a proper exchange rate policy and to ensure confidence in the guilder. As a result, it is also necessary to hold currency that offers a low rate of return. The gold is not held for speculation, but is a cornerstone of the monetary policy of the Netherlands as a major gold holding nation. When deciding on the time at which it sold some of the gold, the gold price did not play any role whatsoever.

The suggestion to use the principal proceeds to flow to the treasury could no find grace: the change in the composition of reserves (gold was converted into US dollars, D-marks and yen) is not a reason to pour assets of the central bank into the hole of the national deficit. If DNB would give in to this temptation that would be a monetary sin: financing the government deficit by the central bank. That happens in South America, or in Italy, but not in countries that appreciate a hard currency.

Parity

Gold plays a vital role in finance since trade emerged. Late last century all European countries and the United States went on the classical gold standard. The direct link between the amount of money in circulation to gold reserves at central banks broke the economies of the industrialized countries in the economic depression of the thirties. The Netherlands held on to gold until 1936 as one of the last countries together with Switzerland and France.

After the Second World War the US dollar ruled. Under the Bretton Woods system, which was set up in 1944 under US-British leadership, all currencies were pegged to the US dollar. This provided stability and dynamics because the Americans constantly pumped new dollars into the world economy. The Bretton Woods system created unprecedented economic growth for a quarter of a century. The gold did not disappear completely. To increase the credibility of the system, the United States declared their readiness to ensure the conversion of dollars into gold at a fixed price of 35 dollars per troy ounce (31.1 grams). The Americans could easily make that offer, because in 1944 they were in possession of three quarters of all the gold reserves in the world.

The Dutch government in exile had largely spent its gold reserves during the war. During the reconstruction foreign exchange reserves piled up in the fifties and sixties and DNB happily took advantage of the opportunity to convert dollars that were earned through exports, for gold in the US. Together with France The Netherlands was in those years the largest gold accumulator. French President General Charles de Gaulle said, in a famous news conference on 4 February 1965, about the US dollar hegemony and gold, “Ah! Gold its nature never changes, not in any form, bars or coins. It has no nationality, it is held eternal and universal as the unchangeable and trustworthy value par excellence”. Also in The Netherlands gold was held as an article of faith.

During the sixties the US gold reserves in Fort Knox severely declined. Eventually, President Nixon decided in 1971 to temporarily suspend the convertibility of dollars into gold. The ‘gold window’ was closed; the world had spent well over twenty five years to tap into the US gold reserves.

Since 1971 the gold reserves of DNB hardly changed. The spectacular rise in gold price to $850 dollars per troy ounce in early 1980 led to a great gain in the books but that was all. However, politicians in the seventies had their greedy eyes on the gold stocks to use these for employment projects and other fun things for the people to finance. President of DNB at the time, Dr. Jelle Zijlstra, abhorred such ideas. Not a single gram of gold was sold from the vaults of DNB.

Zijlstra and his successor Duisenberg feared gold sales would affect the position of the guilder. Moreover, the government deficit was so huge in the eighties that sales would be interpreted by financial markets as weakness. Gold supported confidence in the guilder and provided an aura of invulnerability.

Drawbacks

During 1991 the gold inventories were casually mentioned in a conversation between senior officials of the Ministry Of Finance and DNB during the preparations for the Economic and Monetary Union (EMU) – the plan for a European central bank and a common currency, which was clinched in the Maastricht Treaty. It was clear that the size of the Dutch gold stock was well above average in the EC. This would be disadvantageous if in a few years DNB must transfer part of its reserves to the European Central Bank (ECB).

As a rich gold country the Netherlands is at a disadvantage, because it participates for a relatively small amount in the ECB. The Netherlands threatens to get stuck in the monetary union with a huge amount of gold – that doesn’t yield – because according to ECB rules participating central banks may only purchase or sell gold and foreign exchange reserves with approval by the ECB. After ratification of the Maastricht Treaty, the freedom of DNB would be very limited. “The Netherlands has no interest in a large amount of gold”, said a source familiar with the matter.

The Netherlands receives a 4.7 percent share in the ECB based on the size of the Dutch population and the national economy. That’s less than the Dutch share of 7.3 percent in total international reserves (gold and foreign exchange) of all central banks in the EC and much less than the share of 11.7 percent in gold reserves. Even after the sale of 400 tonnes the Netherlands retains a stake in the EC gold reserves of 9.4 percent. DNB is expected to sell another 685 tonnes of gold to bring their gold share in line with that of the ECB. To reassure the gold market DNB states it will not sell any more gold, though financial experts expect that the gold reserves by EC central banks, including DNB, will be further adapted within the framework of the monetary union. “Last year the Belgian and Dutch central banks sold gold. That made gold sales by central banks respectable. Additional sales threaten the market”, said a London bullion dealer.

In the beginning of 1992, still in the fuddle of Maastricht and nine years after the traumatic devaluation of the guilder in 1983, the position of the guilder was very strong and the Dutch budget deficit was considerably reduced. In The Hague no one advocated to do any more fun things with the Dutch gold stocks. The time was right to proceed to sale.

Small World

It was not possible that DNB would enter the gold market itself, because that would be known immediately in the closed world of gold trading. The few remaining Dutch players in the gold market are tiny. In London, there are four major gold traders, Sharps Pixley, Samuel Montague, Mase Westpac and Rothschild. According to John Coley, spokesman of the London Bullion Market Association, it was obvious that DNB would use the BIS as an intermediary. Duisenberg is very well known in Basel because he was President Of The Board of the BIS from 1988 to 1990.

duisenberg
W Duisenberg

The advantage of the BIS is, as “central bank of central banks”, that it guarantees anonymity and direct access to the central banks of the member countries in Eastern and Western Europe as well as Australia, Canada, Japan and South Africa. A London trader suggested that DNB used the central bank of another member state of the BIS to bring the gold to the market. That could have been the central bank of South Africa, whose gold offers would not surprise any traders. South Africa is always very active in the London bullion market. The BIS could have acted as an intermediary between DNB and the South African central bank.

“Part of the sale was handled outside the market”, says Philip Klapwijk of Goldfield Mining Services. He says he came to this conclusion because the price of gold last year, although down slightly, it should have shown much greater fluctuations if 400 tonnes would have been sold – even if the supply would be split into small tranches.

The BIS probably made contact with the People’s Bank of China as the buyer. Why precisely the People’s Republic of China? Chinese love gold, says an expert, and he refers to the huge Taiwanese gold purchases in 1987. Second, China has large dollar surpluses as a result of the spectacular economic growth. And third, China announced that it is working to build up its reserves in order to bring it more in line with the size of the Chinese GDP.

The weekly table of DNB, which is published every Wednesday in the newspaper, we can see since February a decline in Dutch gold reserves. Presumably, the increase in the gold reserves of China will never be visible. The statistics produced by the International Monetary Fund for China record the same amount of gold for a decade, coincidentally about 400 tonnes. China experts, however, know that the People’s Bank has second secret gold reserves, which are held outside the statistics in “non-monetary gold”. If part of the gold reserves of DNB have been added to these, as many suspect, no one will ever officially know.

The Big Reset, Part 1

The sole reason why I became interested in gold is because of the book “Overleef De Kredietcrisis” (How To Survive The Credit Crisis), written by Willem Middelkoop – the Dutch equivalent of Jim Rickards – in 2009. This book opened my eyes and interest for economics and I didn’t stop reading and writing about it ever since.

Willem Middelkoop 2011

Middelkoop had written four books in Dutch when he decided to switch to English, his latest book has just been relesed: The Big Reset. This book is about the War on Gold and the plans behind the scenes to create a new gold-backed world reserve currency. I had the privilege to do a Q&A with Middelkoop about his latest book. The Q&A will be published on this website in two parts.

The Big Reset

How did you started to invest in gold?

Because of the books by Indian economist Ravi Batra in the1990’s I became aware of the anti-cyclical nature of gold. Through my internet research in 1999, when the internet bubble was getting pretty scary, I had learned about GATA and learned a great deal about fiat and hard money. After I took profits on my real estate investments in Amsterdam between 2001 and 2004 I started to invest in physical gold and silver and bought my first shares in precious metal companies in 2002. In the following yearns I experienced that investing in junior mining and exploration companies who worked on new discoveries delivered the best results. This first led to the publication of the Gold Discovery Letter and in 2008 to the start of the Gold Discovery Fund, which was renamed Commodity Discovery Fund in 2010 because some investors like the commodities more than gold. We have some 600 high net-worth Dutch investors and invest in (junior) mining companies. 50% is gold related, 25% silver related. We also have some Rare Earth and base metal investments. Because of the ongoing ‘World Championship Currency Debasement’ we expect much high prices for precious metals in the next few years.

Your new book is named The Big Reset, isn’t our current monetary system sustainable?

No, we now have arrived at the point where it is not the banks, but the countries themselves that are getting in serious financial trouble. The idea that we can ‘grow our way back’ out of debt is naive. The current solution to ‘park’ debts on to the balance sheets of central banks is just an interim solution. A global debt restructuring will be needed, as economists Rogoff en Reinhart recently explained in their working paper for the IMF. This will include a new global reserve system to replace the current failing dollar system, probably before 2020.

So you are not on your own with this call?

Right after the near death experience of the global financial system at the end of 2008 the IMF and others started to study the possibilities for a next phase of the financial system. In 2010 the IMF published a study titled ‘Reserve Accumulation and International Monetary Stability’ for a financial system without a dollar anchor. The United Nations called for ‘a new Global Reserve System’ based on the IMF’s Special Drawing Rights (SDR’s) a year later. The SDR was created in 1969, at the time the London Gold Pool couldn’t hold gold at $35 and the U.S. lost over 10,000 tons of gold because countries like France and the Netherlands returned excess dollar reserves to the U.S. treasury and demanded physical gold. This development led to the end of the gold backed dollar in August 1971, when President Nixon closed the gold window and the first dollar crisis started. It led to the run up of gold towards $880 in 1980. The UN idea is endorsed by China who has publicly stated several times that it is dissatisfied with the present dollar-orientated system. In 2009 China’s Central Bank Governor Zhou Xiaochuan advocated a new worldwide reserve currency system. Late 2013 the Chinese state press openly called to ‘de-Americanize’ the world’. In an official op-ed the idea for ‘the introduction of a new international reserve currency  to replace the dominant U.S. dollars’ was mentioned again. According to the London based think thank Official Monetary and Financial Institutions Forum (OMFIF) it will take many years before the renminbi will mount a credible challenge to the dollar. The euro is not suitable either.

How will this change unfold?

Our financial system can be changed in almost every way as long as the main world trading partners can agree on these changes. Two major problems in the world’s financial system have to be addressed, the demise of the U.S. dollar as the world reserve currency and the almost uncontrollable growth of the worldwide mountain of debts and central banks’ balance sheets. A reset planned well in advance can and probably will consist of different stages. So currently the U.S. together with the IMF seems to be planning a multiple reserve currency system as a successor of the current dollar system. But this system which still include and center around the dollar, but other important currencies will be added at its core. OMFIF has published an interesting study last year. They remarked:

‘This marks the onset of a multi-currency reserve system and a new era in world money. For most of the past 150 years, the world has had just two reserve currencies, with sterling in the lead until the First World War, and the dollar taking over as the prime asset during the past 100 years. The pound sterling  has been in relative decline since the Second World War. The birth of the euro in 1999 has turned the European single currency into the world’s no. 2 reserve unit, but it has been now officially accepted that the dollar and the euro share their role with smaller currencies. The renminbi has attracted widespread attention as a possible future reverse currency. But it’s still be some years away from attaining that status, primarily because it is not fully convertible.’

Some American insiders have even been calling for a return to the gold, isn’t it?

In an open letter to the Financial Times in 2010 titled ‘Bring back the gold standard’, the very well connected and former President of the World Bank Robert Zoellick pointed out he wants to use gold as a reference point in order to reform the current failing financial system. Mr. Zoellick explained an updated gold standard could help retool the world economy at a time of serious tensions over currencies and U.S. monetary policy. He said the world needed a new regime to succeed the ‘Bretton Woods II’ system of floating currencies, which has been in place since the fixed-rate currency system linked to gold broke down in 1971. He said the new system.

‘is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi. The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.’

According to the famous publisher Steve Forbes, who was also an advisor for some of the presidential candidates in 2012,  ‘the debate should be focused on what the best gold system is, not on whether we need to go back on one.’ So it was at no surprise for me to see an interview with professor Robert Mundell in Forbes magazine, in which he argued for a return to the gold standard. Mundell can be seen as one of the architects of the euro, and has acted as an advisor to the Chinese government as well. Mundell said:

There could be a kind of Bretton Woods type of gold standard where the price of gold was fixed for central banks and they could use gold as an asset to trade central banks. The great advantage of that was that gold is nobody’s liability and it can’t be printed. So it has a strength and confidence that people trust. So If you had not just the U.S. dollar but the U.S. dollar and the euro tied together to each other and to gold, gold might be the intermediary and then with the other important currencies like the yen and Chinese Yuan and British pound all tied together as a kind of new SDR that could be one way the world could move forward on a better monetary system.’

And China supports these ideas for a currency reset?

As you know Chinese Central Bank Governor Zhou Xiaochuan advocated a new worldwide reserve currency system as early as 2009. He explained that the interests of the U.S. and those of other countries should be ‘aligned’, which isn’t the fact in the current dollar system. Zhou advised to develop the SDR’s into a ‘super-sovereign reserve currency disconnected from individual nations and able to remain stable in the long run’. According to some experts the IMF needs at least five years more years to prepare the international monetary system for a worldwide introduction of SDR’s to be used worldwide. Some doubt if we will have the luxury to wait that long. The fact China is stopped buying U.S. Treasuries in 2010 and have been loading up on gold ever since tells a great deal. Chinese high level officials have indicated China wants to grow their gold reserves ‘in the shortest time’ to at least 6,000 tons, in anticipation for the next phase of world financial system. A recent report by Bloomberg suggest The People’s Bank of China and private investors has been accumulating over 4,000 tons since 2008. The Chinese are afraid the U.S. could surprise the world with a gold revaluation. Wikileaks leaked a cable sent from the U.S. embassy in Beijing early 2010. The message, which was sent to Washington, quoted a Chinese news report about the consequences of such a dollar devaluation as it appeared in Shanghai’s Business News:

‘If we use all of our foreign exchange reserves to buy U.S. Treasury bonds, then when someday the U.S. Federal Reserve suddenly announces that the original ten old U.S. dollars are now worth only one new U.S. dollar, and the new U.S. dollar is pegged to the gold – we will be dumbfounded.’

Can you explain the love for gold by the Chinese?

They know, even from their own history, gold has been used again and again to rebuild trust when a fiat money system has reached its endgame. As you might know, from your own studies, the main academic journal of the Chinese Communist Party’s Central Committee published an article in 2012 that sheds a light on the Chinese monetary or should we say gold strategy. The article [exclusively translated by In Gold We Trust] was written by Sun Zhaoxue, president of both the China National Gold Corporation (CNG) and the China Gold Association (CGA). Sun stated:

‘Increasing gold reserves should become a central pillar in our country’s development strategy. The state will need to elevate gold to an equal strategic resource as oil and energy, We should ‘achieve the highest gold reserves in the shortest time. Individual investment demand is an important component of  China’s gold reserve system; we should encourage individual investment demand for gold.’

According to my research the Chinese are now in the final stage to grow their gold reserves to 6,000 tons. They want to grow these reserves towards 10,000 tons before 2020. That amount will bring the Chinese on par with the U.S. and Europe on a gold/GPD ratio. This opens the door to a possible joint US-EU-China gold supported financial system like the IMF’s SDR-plan. Such a reset could also be backed by Russia since they have accumulated over 1,000 tons, most of it since the start of the credit crisis in 2008.

Do China (and Japan) have the same debt problems like the western countries?

According to John Mauldin, author of ‘The End Game’ and ‘Code Red’ China is ‘even more addicted to money printing than the US or Japan’. Despite national financial reserves of almost $4,000 billion, China has been confronted with its own debt crisis, after Chinese banking system’s assets grew by $14 trillion between 2008 and 2013. The old Chinese communist leadership still remembers how they succeeded to grab power because of the monetary problems between 1937–1949. Their main goal is to avoid social unrest like China experienced during a period of hyperinflation after World War II.

What do the Chinese know about the War on Gold?

Sun Zhaoxue explained in 2012:

After the disintegration of the Bretton Woods system in the 1970s, the gold standard which was in use for a century collapsed. Under the influence of the U.S. Dollar hegemony the stabilizing effect of gold was widely questioned, the ‘gold is useless’ discussion began to spread around the globe. Many people thought that gold is no longer the monetary base, that storing gold will only increase the cost of reserves. Therefore, some central banks began to sell gold reserves and gold prices continued to slump. Currently, there are more and more people recognizing that the ‘gold is useless’ story contains too many lies. Gold now suffers from a ‘smokescreen’ designed by the US, which stores 74% of global official gold reserves, to put down other currencies and maintain the US Dollar hegemony.

He then also explained how the US is debasing the value of its currency in a move to get rid of too much debt:

‘The rise of the US dollar and British pound, and later the euro currency, from a single country currency to a global or regional currency was supported by their huge gold reserves.  Especially noteworthy is that in the course of this international financial crisis, the US shows a huge financial deficit but it did not sell any of its gold reserves to reduce debt. Instead it turned on the printer, massively increasing the US Dollar supply, making the wealth of those countries and regions with foreign reserves mainly denominated in US Dollar quickly diminish, in effect automatically reducing their own debt. In stark contrast with the sharp depreciation of the US Dollar, the international gold price continued to rise breaking $1900 US Dollars per ounce in 2011, gold’s asset-preservation contrasts vividly with the devaluation of credit-based assets. Naturally the more devalued the US Dollar, the more the gold price rises, the more evident the function of US gold reserves as a hedge.’

Additional proof of the Chinese knowledge about the gold price suppression can be found in message leaked by Wikileaks from the American Embassy in Peking about a Chinese newspaper report:

‘The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold’s function as an international reserve currency. They don’t want to see other countries turning to gold reserves instead of the U.S. dollar or Euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar’s role as the international reserve currency. China’s increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB.’

The office building of JPMorgan with its largest private gold vaults at Chase Manhattan Plaza, opposite to the New York Federal Reserve building, has been recently sold to the Chinese. This indicates the US and China seem to be working together in advance towards a global currency reset whereby the US, Europe and China will back the SDR’s with their gold reserves so the dollar can be replaced.

NYC-view02-China-WEB

More about the War on Gold next week in Part 2

Synopsis of The Big Reset: Now five years after the near fatal collapse of world’s financial system we have to conclude central bankers and politicians have merely been buying time by trying to solve a credit crisis by creating even more debt. As a result worldwide central bank’s balance sheets expanded by $10 trillion. With this newly created money central banks have been buying up national bonds so long term interest rates and bond yields have collapsed. But ‘parking’ debt at national banks is no structural solution. The idea we can grow our way back out of this mountain of debt is a little naïve. In a recent working paper by the IMF titled ‘Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten’ the economist Reinhart and Rogoff point to this ‘denial problem’. According to them future economic growth will ‘not be sufficient to cope with the sheer magnitude of public and private debt overhangs. Rogoff and Reinhart conclude the size of the debt problems suggests that debt restructurings will be needed ‘far beyond anything discussed in public to this point.’ The endgame to the global financial crisis is likely to require restructuring of debt on a broad scale.

About the author: Willem Middelkoop (1962) is founder of the Commodity Discovery Fund and a bestselling Dutch author, who has been writing about the world’s financial system since the early 2000s. Between 2001 and 2008 he was a market commentator for RTL Television in the Netherlands and also appeared on CNBC. He predicted the credit crisis in his first bestseller in 2007.

Link Willem Middelkoop