Tag Archives: SDR

Song Xin: Increase Gold Reserves And Join SDR.

The Chairman of the China Gold Association and General Manager and Party Committee Secretary of China National Gold Group Corporation, the latter being China’s largest gold mining enterprise, is Song Xin and happens to be one of my favorite commentators in China. This gentleman made waves in July 2014 when he candidly wrote on Sina Finance that the People’ Bank Of China (PBOC) should slowly raise its official gold reserves to 8,500 tonnes, more than what the US Treasury claims to hold. The article was published in Chinese but translated by BullionStar to share the views by Song Xin with the English speaking world:

For China, gold’s strategic mission lies in the support of renminbi internationalization, and so let China become a world economic power and make sure that the China Dream is realized. … gold forms the very material basis for modern fiat currencies. 

Gold is the world’s only monetary asset that has no counter party risk…

That is why, in order for gold to fulfill its destined mission, we must raise our gold holdings a great deal, and do so with a solid plan. Step one should take us to the 4,000 tonnes mark, more than Germany and become number two in the world, next, we should increase step by step towards 8,500 tonnes, more than the US.

In the next translation further below you will read more on how Song Xin views gold’s role in China’s financial strategy. The bullet points from the article:

  • China continuously accumulates gold reserves to support and accelerate renminbi internationalization.
  • Renminbi confidence and gold are closely related. Gold reserves are the cornerstone for renminbi internationalization.
  • In modern times gold plays an important role in managing economic risk and maintaining China’s financial safety.
  • China is continuously increasing its official gold reserves in conjunction to joining the SDR.
  • The ratio of China’s official gold reserves to its GDP should be more in line with the US and other developed countries. At this moment China’s official gold reserves are still relatively low.
  • The Silk Road economic project, also called “One Belt and One Road” (OBOR), has huge development opportunities for the Chinese gold industry. Song Xin mentions that the in ground gold reserves of countries along OBOR reach 21,000 tonnes. In 2015, witnessed by Chairman Xi Jinping and President Putin, China National Gold Group Corporation and Russia’s largest gold mine Polyus have signed a strategic cooperative agreement and they are promoting detailed relevant cooperative issues at present.

What he didn’t mention is that China is striving to boost gold trade along OBOR to be settled in renminbi through the Shanghai International Gold Exchange.

Is The SDR A Means Or And End For China? 

In the mainstream media we often read China wants the SDR to replace the US dollar as the world reserve currency, based on statements from PBOC Governor Zhou Xiaochuan – among others:

Special consideration should be given to giving the SDR a greater role. The SDR has the features and potential to act as a super-sovereign reserve currency.

Since 2009 China has vigorously pressured the IMF for renminbi inclusion into the SDR. Finally, in 2015 the IMF decided the renminbi would be added to its currency basket in October 2016.

Zhou and other prominent economists at the PBOC are clearly pushing the SDR, but what’s China’s exact strategy?

In advance of the official inclusion of the renminbi into the SDR, which will take place on October 1, 2016, developments regarding the International Monetary Fund’s synthetic reserve currency are unfolding rapidly.

Author of the Big Reset, Willem Middelkoop, reported this August a “Substitution Fund” is being discussed in the higher echelons of the monetary elites, to facilitate dollar exchange for SDRs outside the market, and thus creating an escape from dollar reserves without putting downward pressure on the dollar.

Also in August, The PBOC allowed a division of the World Bank (the IBRD) to issue bonds denominated in SDRs in the Chinese market. The bonds worth $2.79 billion dollars can be created “soon” – presumably within a month. In addition, the Chinese government-linked China Development Bank will issue SDR notes worth somewhere in between $300 million to $800 million dollars. Both issues are “SDR-denominated financial market instruments” called M-SDRs by the IMF. Though experts think the M-SDRs will encounter many practical challenges when implemented and demand will be tepid, nevertheless the intention by the PBOC to launch these instruments is clear.

On the surface we can observe China has a vast interest in the SDR, but is the SDR a means or an end for China? What if China is simply using the SDR as a vehicle to achieve other objectives? For example:

  1. Dethroning the dollar. The SDR can be an excellent tool to unwind the dollar hegemony. In addition the Substitution Fund could help an orderly exit from China’s lob-sided dollar reserves.
  2. Internationalize the renminbi. Inclusion of the renminbi into the SDR boosts global renminbi acceptance as a reserve currency.
  3. Reduce capital outflows from China. With respect to M-SDRs, David Marsh of financial think tank the Official Monetary and Financial Institutions Forum (OMFIF) wrote:

Beijing’s SDR capital market initiative will allow domestic Chinese investors to subscribe to domestic bond issues with a significant foreign currency component, which will help dampen capital outflows… 

I think for China the SDR is just a means to an end. The end being to internationalize the renminbi, which of course is connected to the dollars retreat. And as Song Xin clearly states, “gold forms the very material basis for modern fiat currencies” and, “gold reserves should become the cornerstone … for renminbi internationalization”.

In my humble opinion the financial crisis has shown (once again) the inherent flaws of all fiat currencies. A bundle of some of these currencies will not solve the problems ahead of us; at best provide tools or a next level printing press. I still prefer gold as a store of value.

I find it interesting that Song Xin mentions the importance of the ratio between China’s official gold reserves and GDP. This concept was also brought forward by Jim Rickards. If the PBOC would have 5,000 tonnes of official gold reserves their “gold to GDP ratio” would be roughly on par with to the US, Europe and Russia.  One of the theories about our current international monetary system – that was detached from gold in 1971 – is that it can 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 a roughly equal ratio of official gold reserves to their GDP, the international monetary system could make a transition towards gold.

Global gold vs GDP

According to my estimates the PBOC has roughly 4,000 tonnes in official gold reserves, in contrast to what is publicly disclosed at 1,800 tonnes. Perhaps the PBOC is “nearly there”.

Song Xin who was also a speaker at the “Renminbi Internationalization and China’s Gold Strategy Seminar” in Beijing on 18 September 2015.

Original source of the article below is the China Gold Association website. [Brackets added by Koos Jansen]

Song Xin, Chairman of the China Gold Association, General Manager and Party Committee Secretary of the China National Gold Group Corporation: Stick to the gold mission and boost innovative development

March 14, 2016

As the sole central enterprise in the gold industry, China National Gold Group Corporation is a firm defender of renminbi internationalization, pioneering demonstrator of the country’s “One Belt and One Road”, and faithful guardian of a happy life for people. It’s the direction that we should strive for.

On March 10 during the two assemblies, Song Xin, Chairman of the China Gold Association, General Manager and Party Committee Secretary of the China National Gold Group Corporation, was the guest in Xinhuanet’s 2016 two assemblies special Interview. In the program Dialogue with New State-owned Enterprises and Cheer up in the “13th Five-Year Plan”, he proposed the conclusions above. Besides, in the in-depth dialogue, Song Xin systematically illustrated topics including the functions of renminbi internationalization, effectively enhancing gold supply, realizing improved quality and efficiency of enterprises, practicing the central party’s “Five Development Theories”, and fulfilling the responsibilities of central enterprises.

About Gold’s Functions: Increase Gold Reserves And Accelerate Renminbi Internationalization. A Close Relationship between Increasing Gold Reserves And Joining The SDR

When the credit lines of paper currency declines and there are enough gold reserves, people can be less worried about the existing credit system and enhance their confidence in the currency.

Last year, China joined the IMF (International Monetary Fund) Special Drawing Rights (SDR), signifying the renminbi’s march towards internationalization.

Song Xin pointed out that the renminbi is closely related to gold. Gold is priced in US dollars throughout the world and in renminbi in China. There is a special relation between the renminbi and gold. We have continuously increased gold reserves since China strove to join the SDR basket of currencies. By the end of February this year, our gold reserves have increased to 1788.45 tonnes. In other words, China has continuously increased its official gold reserves and publicized the amount to the world, keeping a close relation with renminbi internationalization and joining the SDR.

Song Xin 2016:07:26

Further increase gold reserves to adapt to economic strength

China’s existing gold reserves are only about 1/5 of America’s. With the acceleration of renminbi internationalization, the renminbi should further increase its gold reserves in order to reach a level matching the national economic aggregate [GDP], especially if the renminbi wants to become a global currency.

Song Xin mentioned that China’s gold reserves once maintained around 1,054 tons. In the second half of last year, it started to increase these reserves substantially. Now, it has been increased by 70%. The increase range is big, but small compared to that of developed countries. At present, our economic aggregate [GDP] reaches second place in the world, but our gold reserves only reach the sixth place in the world. If the IMF’s reserves are excluded, China’s reserves rank in fifth place according to national rankings.

Possessing sufficient gold can strengthen confidence in a currency

Song Xin said, “There is a remarkable distance between China’s gold reserves and America’s gold reserves. America’s gold reserves are 8,133 tons and it even reached over 20,000 tons before. In those days, America controlled most of the gold in the world, which laid an important foundation for the US dollars to become a global currency.”

Before the Bretton Woods system was disintegrated in the 1970s, gold was directly connected with the US dollar. After the Bretton Woods system was corrupted, gold was disconnected from the US dollar, but America still kept sufficient gold reserves.

Song Xin believes that it has a relation with the global governing system. When the global economic aggregate was not so big, the gold standard had a certain advantage. With the expansion of the economic aggregate, the Bretton Woods system was disintegrated, and gold was disconnected from the US dollar. America announced that gold was unimportant then under this circumstance. However, in fact, when a financial crisis happens in America, its gold reserves don’t reduce at all. Americans firmed up people’s confidence in the US dollar by sufficient gold reserves.

Talk about supply reform: increase the effective supply of gold to boost quality and efficiency of enterprises rather than excess capacity, the gold industry needs to increase supply

In 2015, our domestic gold mine output reached about 450 tons, ranking the top in the world for nine consecutive years. Meanwhile, gold [retail] consumption reached almost 986 tons, surpassing India for three consecutive years and becoming the largest gold consumption country in the world.

Song Xin mentioned that our gold production can’t satisfy consumption demand and it doesn’t include the central bank’s reserves. Therefore, for the gold industry, increasing gold production and rapidly supplementing the gap above are the important missions for the gold industry.

Regarding how to increase the effective supply of gold, Song Xin believes that enterprises in the gold industry should offer more suitable marketing paths, especially customers’ favorite gold jewelries and gold investments with cultural connotation and innovation.

Maintain national financial safety and fulfill political responsibility 

“The political responsibility of the China National Gold Group Corporation is to make enterprises strong, excellent and big. Besides that, it is also to allow staff to enjoy the achievement of enterprise development. More importantly, it is to increase the effective supply of gold, to satisfy the demands of people and country for gold products, and to maintain the healthy and harmonious development of the industry”, said Song Xin.

Song Xin introduced that gold played a very important role in different historical periods. In the revolutionary war period, the underground party delivered abundant gold to Yan’an from the Jiaodong base area in order to get medicine and materials, playing a positive role for the Communist Party to gain victory. In the beginning of reform and opening up, the country’s foreign exchange was in a shortage and our country vigorously increased gold productivity, once amounting to 70% of the whole country’s foreign exchange reserve which is mainly for gold swap transactions and purchasing devices, etc. and guaranteeing foreign exchange demand of economic development. In the new era, gold has played an important role in resisting economic risk, maintaining the country’s financial safety and assisting with renminbi internationalization.

Song Xin thinks that the China National Gold Group Corporation shoulders the important mission of increasing gold reserves and production and adding trust for renminbi internationalization for the country. He said, “Gold reserves should become the cornerstone or ballasting stone for renminbi internationalization, which can improve the gold content of renminbi. In these aspects, the China National Gold Group Corporation is obligated to fulfill its own political duty.”

Chinese historic gold mining 1949 - 2015

Talk about “Five Major Development Concepts”: Explore Profound Meaning Based on Practical Conditions for Enterprise.

Make achievement in the “One Belt and One Road”

With the implementation of “One Belt and One Road”, the China National Gold Group Corporation can accomplish a lot in “going out” and “going out” is an important constituent of our reform and opening up in the new era. “One Belt and One Road” has brought huge development opportunity for Chinese gold industry and enterprises. Song Xin mentioned that the gold [in ground] resources of countries along the “One Belt and One Road” reached 21,000 tons, taking up 41.5% in the world. The gold production of countries along the line reached 1,116 tons, occupying 1/3 in the world. In addition, 6 gold mines are located here among top 20 gold mines in the world.

“The consumption amount of gold jewelry in the area accounts for 82.4% of the global consumption amount. Physical gold item demand including gold bars takes up 77% of the global demand. Gold resource development potential and gold market consumption potential in the area are quite huge, bringing important strategic opportunities for Chinese gold enterprises”, he said.

Song Xin introduced that the China National Gold Group Corporation is constructing mines in Kyrgyzstan and Congo. Last year, witnessed by Chairman Xi Jinping and President Putin, China National Gold Group Corporation and the largest Russian gold enterprise have signed a strategic cooperative agreement and they are promoting detailed relevant cooperative issues at present. Meanwhile, they are preparing to export devices to countries along the “One Belt and One Road” including Russia and Kazakhstan. In the practice of open concept, China National Gold Group Corporation is comprehensive and systematical.

Analyzing PBOC Official Gold Reserves Increment

As always, please make sure you’ve read The Mechanics Of The Chinese Domestic Gold Market before continuing.

Finally last Friday the People’s Bank Of China (PBOC) updated its official gold reserves, from 1,054 tonnes, a figure reported since 2009, to 1,658 tonnes. Most gold analysts expected a number substantially higher than what was just disclosed. In this post we’ll analyze the 1,658 tonnes figure.

Before diving into the analysis, I like to share that I think it’s possible the PBOC hasn’t been completely honest by stating their gold reserves have grown by only 604 tonnes since 2009. I think in reality they have more than 1,658 tonnes, but let’s discuss that later on. In my analysis, I always try to start with official data and work my way from there, instead of start with speculative data and work backwards. It’s very easy in the gold space to rebut all official data, mainly because there is so much speculation. Therefor, I would like to start with the figure just disclosed, then I’ll try to answer, why 1,658 tonnes?

PBOC Gold Reserves Increment Was Covertly Imported

With regard to the update in gold reserves, the PBOC has stated on its website (in Chinese):

Based on our assessment of the asset value of gold and analysis of price movements, on the condition of not impacting or influencing the market, through various domestic and international channels, we gradually accumulated this part of gold reserves. The major channels of accumulation include: purifying domestic gold scraps and gold of various grades [杂金 in Chinese usually means non-standard gold including scraps so I have to paraphrase it], direct purchase of production, transaction in domestic and foreign markets, etc.   

The official narrative is that the PBOC has bought 604 tonnes of gold in the domestic and international market. From my perspective, however, I think the PBOC has mainly been buying gold in the international market, as that’s where superfluous US dollars can be exchanged for gold. In the Chinese domestic gold market, physical gold is settled in renminbi. Gold the PBOC potentially has obtained in the mainland would be from state owned mines that not sell their gold through the Shanghai Gold Exchange, but have the gold directly transported to central bank vaults.

Not so long ago I wrote a lengthy post on PBOC gold reserves, it was titled PBOC Gold Purchases: Separating Facts from SpeculationThe article contained a few concepts I still believe in:

  • The PBOC does not buy gold through the Shanghai Gold Exchange (SGE).
  • PBOC purchases/shipments are not disclosed in global customs reports.
  • As a consequence, everything we can see going into China (exports from other countries to China which are required to be sold through the SGE) and domestic mine supply (which is mainly sold through the SGE) are being added to private gold reserves and does not end up at PBOC vaults.

According to the China Gold Association (and global trade data), mainland net gold imports from 2010 until 2014 accounted for 3,967 tonnes and domestic mining output over this period totaled 1,979 tonnes; a combined 5,964 tonnes.

To summarize we know that:

(1) Laws and tax incentives direct Chinese gold import and gold mine supply to be sold through the Shanghai Gold Exchange

(2) Chinese private gold demand is all supplied through the SGE

(3) Physical gold at the SGE can only be settled in renminbi

4) The PBOC is likely to buy gold abroad with US dollars (not renminbi) to diversify their lopsided FX reserves and

(5) In 2014 an SGE official confirmed that the PBOC did not buy gold through the Shanghai gold bourse

With this knowledge, it’s easy to understand the PBOC did not buy the 5,964 tonnes of gold that was supplied to China 2010-2014 through import and mining. The 5,964 tonnes was consumed by private gold buyers at the Shanghai Gold Exchange. To repeat myself, PBOC gold purchases cannot be traced from global trade data or SGE withdrawals, as these occur in the realm of the private Chinese gold market.

One more reason why the gold exports to China we can see – for example in Hong Kong customs reports – are not addressed by the PBOC is that it can be observed  that gold bullion is being declared as either non-monetary or monetary gold when studying customs data from any country. If the PBOC can choose how to declare their bullion, they’ll choose monetary. These are typically the options available when making a gold customs reporting:

  • Gold, for non-monetary purposes (HS code 71081100)
  • Gold, unwrought, for non-monetary purposes (HS code 71081200)
  • Gold, in semi-manufactured forms, for non-monetary purposes (HS code 71081300)
  • Monetary gold (HS code 71082000)

The essential difference between these four categories is that “monetary gold” is always blank; this category is never disclosed publicly! As we know, the PBOC prefers to buy gold in secret, so their gold transport surely is hidden in the eclipsed category “monetary gold”. It’s thus pointless to try to measure PBOC gold reserves from available customs data on gold, as this data doesn’t show gold monetary shipments. From trade data we can only see what’s entering China for private gold demand sold through the SGE.

From this perspective all official gold data presented above makes sense; all these thousands of tonnes of gold we could see entering China fell into the hands of private hoarders.

My supposition can be further strengthened if we re-read translations from Chinese gold industry officials I’ve published over the years. From Sun Zhaoxue, President of the China Gold Association in 2012:

We should advocate to ‘store gold among the people’ and guide a healthy positive development in this segment. In recent years, the domestic gold industry’s rapid growth provided good conditions for various uses of gold, as well as create space for this business to grow faster. China … has to catch the opportunity, while increasing its supply capacity, to push the ‘store gold among people’ strategy, actively extend the business value chain, increase gold investment types, encourage and promote individuals’ gold investment and consumption. Foremost, maximize the utilization of … gold retailers, increase sales channels, optimize sales network, strengthen branding and achieve to ‘store gold among the people’ and thus ‘store wealth among the people’. This is the objective under our gold strategy.

From an internal memo (only published in Chinese) from the PBOC on how to develop the gold market, 2012:

The tradition of gold investment and consumption is with our people/citizens. As the private sector grows at speed and living standard upgrades, private demands for gold jewelry, coins and investment gold are also growing quickly. A gold market with a rich diversity of products will help develop new investment channels, satisfy the varied demand, help investors make appropriate asset allocations, raise investment returns and protect our wealth assets.

There have been many clues the PBOC was buying gold as well, next to Chinese private demand, but for now we’re confirmed the gold we could see going into China over the years has been from the private sector.

Let’s make a new chart:

Estimated Total Chinese Gold Reserves (July, 2015)

I’ve accumulated all domestic gold mining output and known gold imports isolated from “Official reserves” since 2009. The “Official reserves” increments in 2001 and 2003 are subtracted from “Cumulative domestic mining”, the “Official reserves” increments in 2009 and 2015 are not subtracted from “Cumulative domestic mining” or “Cumulative total import”, as my theory is that this was covertly imported. A detailed description of how I compiled this chart can be found in my previous post on this subject.

If I’m right in my analysis that the PBOC has mainly been buying gold abroad since 2009, there are currently 13,781 tonnes of gold in China, of which 1,658 tonnes are (confirmed) official gold reserves and 12,123 tonnes are private reserves. Needless to say, everything the PBOC potentially holds in addition to 1,658 tonnes official reserves must added to these estimates. (I do not rule out the PBOC is able to buy gold in the domestic market.)

PBOC Gold Reserve Increment Is A Strategic Move

The PBOC’s decision to disclose their official gold reserves at 1,658 tonnes cannot be viewed in isolation from global monetary affairs. Since the financial crisis in 2008, Europe and Asia have been very clear in their preference to gradually decrease the emphasis of the US dollar as reserve currency in the international monetary system. China’s strategy is to play multiple hands at the same time of which one is the SDR.

For the development of their economy, China aims to internationalize the renminbi. The composition of the SDR will be reviewed later this year. A requirement for a currency to be included in the SDR is that it’s freely usable. China will thus be required to disclose its reserves at least once yearly by groups of currencies. If we read the official statement on the gold reserves by the PBOC in Chinese, this is apparent from the part containing info about IMF’s Special Data Dissemination Standard (reserves disclosure).

With the US having the power to obstruct renminbi inclusion into the SDR, the Chinese have to play it safe. They are required to be transparent about their true gold reserves, but may not want to upset the US by disclosing an official gold reserve figure at 3,500 tonnes. The 1,658 tonnes figure, which is too little to rock the global financial order, though a sign that China assesses gold to be “an important element of international reserve diversification” may thus be an appropriate figure. It’s not in China’s interest to rush into a new international monetary system as they continue to diversify away from the US Dollar.

China UST holdings

From the above chart, we can see China is not net selling US treasuries, but that they have stopped increasing their accumulated holdings since 2010. The Chinese aren’t ready for a major shift in the international monetary system yet. They are still working on further internationalization of the renminbi, the SDR inclusion, developing their financial markets and opening up their capital account. Only then will they unwind the US dollar. Until then, China will continue to adopt a slow step by step approach.

Guest Post: Spelling Out The Big Reset

Written by LK in Hong Kong

As economies age, debt builds up. Advanced economies – those with the highest borrowing ratings by the reputable agencies they developed – have it clogging up inside all their arteries. The Big Reset will finally become inevitable, as has been acknowledged by the IMF head Largarde, mentioning the year 2020. But what must an Armageddon debt reset necessarily involve? Few have spelled it out, not even in the famous book with the same title “The Big Reset” by Willem Middelkoop.

Revision on money creation mechanics: unwrapping the meaning of ‘Reserves’

At the center of it all, wrapped by layers of secrecy and protected on the outside by purposefully confusing jargons is this concept of Reserves. Let’s understand it to mean ‘net worth’, ‘collateral’, or whatever a banking entity’s ‘really worth’, because what banking entities do, is to use this asset as backing to create instruments and derivatives, like loans, or even money, and expand the money supply. In long tradition, the ultimate reserve asset is of course gold. When the bank’s (or central bank’s) worthiness comes into doubt (like to many gold-deposit receipts flying around), people come for the ‘reserves’. If the reserves satisfy the claims, then it’s good.

In our fiat currency world since 1971, countries hold each other’s currencies as legitimate reserves. The country’s central bank can then go create the country’s own currency. The justification is simple: there is this unsaid assumption that when the worthiness of a country’s money becomes in doubt, one would not question the worthiness of the other currencies held as reserves, and, hence, as long as the country’s central bank can supply the ‘safe’ reserve currency to meet with the country’s currency being sold, all is well. As we approach it from this angle, we know to ask the question, “what then gives the other reserve currencies their value?” Note, this process enables country A to expand the money aggregate in foreign country B also, if only country B is happy to have currency A in its reserve to create some more currency B at will.

Money creation is a happy process. Everyone likes it, from businesses to banks to governments to the everyday wage earner who is happier even if his salary only rises by the same amount as inflation. And this is so even for our debt-money system, in which money is very much ‘loaned into existence’ as a debt is created. The temptation is strong, and this is fundamental.

As the Devil has it, there are two issues with this that are necessary consequences:

(1) With debt comes interest, and if one keeps expanding the borrowing, one day the interest requirement will exceed earning power, and this is where the ‘advanced economies’ are today.

(2) If the money supply grows faster than the amount of goods and services it can be traded for, this leads to inflation. It is important to have people believe that their money is good so they do not have the tendency to convert their money into real assets. Hyperinflation is the currency event in which faith is lost in money and when people rush to buy real assets, they find that there is not anywhere near enough physical assets to satisfy money claims.

Looping back to the concept of reserves, the central idea to a stable banking system is to have people believe that the reserve of the system is good – in sufficient quantity as an ‘end product’.

The Sure-fire way to Reset

Now, our ‘advanced economies’ have already passed the point where interest service is manageable. In an effort to perpetuate the illusion for as long as possible before stage (2) when the quality of the debt papers is called into question, our money masters have launched outright money printing to maintain service of debt interests. They cranked up the power of their mind-influencing machines, and will do “whatever it takes” to avoid their game being called. Clearly this can only exacerbate the onset of Stage (2).

“The Fed’s balance sheet is a pile of tinder, but it hasn’t been lit … inflation will eventually have to rise.”

- Alan Greenspan 25 October 2014, New Orleans Investment Conference.

The problem of a debt reset is not the wiping-out of creditors, but the destruction of currencies together with it. Without currencies, the economy cannot function with any efficiency.

Hence the sure-fire way to reset is to use an indestructible material that exists in fixed, limited quantity to act as reserve asset for money. Gold naturally fulfills this role in any and all precedent failure instances of money and it will work again. Once enacted however, liquidity condition will once again face hard constraint by the physical substance available. Any money printing will translate into a loss of value of each currency unit. Against a strict liquidity condition, life will be much tougher! But it will work.

One step short but keeping the benefits: the SDR?

International monetary expert Jim Rickards has a helpful way to visualize the evolution of financial crises in the West. He explains that every time a crisis breaks out, it is bailed out by the next bigger entity assuming the obligations, “kicked one level upstairs”, in order to avoid a default situation blowing a monetary hole threatening stability. For example, LTCM was bailed out by the banks. When banks get into systemic trouble, they’re bailed out by central banks and sovereigns. What now is the next level up above sovereigns? There isn’t any clear one.

One attempt at this short of going directly to gold might be the Special Drawing Rights of the IMF, claiming to be the super-national authority in charge. The SDR is by design and by hope a reserve asset. It only came to have this funny name by concession to the French in 1969 who did not want it called a reserve asset. As we now understand the nature of reserves, we know it has been the purpose and hope of its creators that when the whistle on fiat currencies blows, people can be convinced to accept this as having value, just because it appears to be issued and controlled by a cross-national group of men in suits. SDR would then be endowed upon obeying nations to be used for ‘good’ money creation. But what is the SDR? It is still a basket of the same fiat currencies.

So, we already see that this might only be the dream of hopeful men in suits and probably won’t work when it is most needed. Enter China and the RMB. The two questions are now:

a) Why does it have a better chance of working, and

b) What does China want?

The answer to a) is, as to what is different now, is that unlike the ‘advanced economies’, China is a creditor nation, and the World’s largest one. If it says okay, it probably is okay a long way already. Plus, China has imported a lot of gold, so it could make references to the gold anchor in ways that are helpful to its aims. By this chart, the gold content within China’s borders is more like 16,000 tonnes, twice as large as the largest official stockpile claimed by any single country (USA).

Total Estimated Chinese Gold Reserves 1995 - 2014

What can China want? By inclusion as a crucial component in the SDR, China gets a control on this international reserve asset, and by deduction, world money supply. The use of reserves is to legitimize money creation. Here is that immortal quote again from the very MA Rothschild himself:

“Give me control of a nation’s money supply, and I care not who make its laws”

It certainly is a very powerful position, although whether China has the ambition to rule the world this way is a different issue. But it is a more flexible possibility than the strict, full gold-fixed gold-backed and effectively gold only currency regime. Mentioned above, money creation is a happy process to all (except when it is collapsing), and often a useful one too.

If things will get so shockingly bad that this will not be enough to instill trust and confidence, the SDR basket may require a fraction of physical gold content. This may then have the appearance of a gold-backed money to most people like the strict, sure-fire solution, with a more subtle twist. The gold content requirement, will indeed hard-limit the reserve and money creation and bestow confidence. But with mutual agreement, the gold proportion can be more easily or very slowly relaxed, slowly and subtly diluting the SDR. Or, if China wants the money aggregate to expand, it can go ahead and post some of its gold. Its acquisition cost is cheap, below $1250 as we speak, well less than 1/10 of its future price when this will be needed. And China has been allowed to have plenty and plenty of this by the willing international community at the average pace of some 40 tonnes a week, every single week and for years on end.

Wiping out creditors by inflation is the easy part. Re-establishing money to restart the world economy is the harder one.

Remember:

“Whoever has the gold makes the rules.” – Wizard of Id, May 3, 1965 (a comic strip)

“Possession is 9/10 of the law”- adage / lawyer joke.

This guest post is written by LK in Hong Kong

Will The Shanghai International Gold Exchange Facilitate Gold Inclusion Into The SDR?

The Shanghai International Gold Exchange (SGEI) was launched in September 2014, to internationalize the Chinese gold market and the renminbi. The timing of the launch is quite remarkable though, in the context of changes in the international monetary system (IMS).

2015 is likely to force a major shift in the IMS. Two developments are worth watching, the SDR basket will be reviewed, the renminbi will probably be adopted later this year, and the rise of the Asian Infrastructure Investment Bank (AIIB), an international financial institution proposed by China with many Western members; currently France, Germany, Italy, Luxembourg, Switzerland, New Zealand and the UK. Both developments are severe blows to the US dollar hegemony.

Last week I reported on, (i) the IMF terms for the renminbi to be adopted into the SDR, (ii) if these terms can be met this year, and (iii) what the role of gold will be in the process (read China, Gold, SDRs And The Future Of The International Monetary System). Since then there has been more confirmation of renminbi adoption in the media.

From Reuters:

China’s yuan at some point would be incorporated in the International Monetary Fund’s Special Drawing Right (SDR) currency basket, IMF Managing Director Christine Lagarde said, …”It’s not a question of if, it’s a question of when,”

From Xinhua:

China and Germany conducted their first high-level financial dialogue here on Tuesday and agreed to strengthen macro-economic policy coordination

…confronted with a complex and fragile global economic situation, China and Germany as important economies should strengthen policy coordination, coordinate strategic cooperation, deepen financial and fiscal cooperation…

Representing Germany at the dialogue, German Finance Minister Wolfgang Schaeuble and Deutsche Bundesbank President Jens Weidmann said that Germany and China have been working together very well both bilaterally and multilaterally in financial and fiscal areas…

According to a joint statement after the dialogue, the German side will actively support … China’s goal to add the RMB to the special drawing rights (SDR) currency basket based on existing criteria.

…During the dialogue, both sides reached consensus on issues such as investment cooperation between China and Europe, China and Germany and in third countries.

Kindly note, Germany officially has the second largest gold reserves in the world and are currently repatriating gold from the US. Thereby expressing their affinity with gold and their lack of trust in the US as their custodian. This Germany would like the renminbi to be included into the SDR.

The most important condition for the adoption of the renminbi is that it must be freely usable. From Criteria for Broadening the SDR Currency Basket, an IMF paper published in 2011, “that discusses a number of reform options for the eligibility criteria for the SDR currency basket”:

The freely usable concept and its two key elements—currencies should be “widely used” and “widely traded” —are set out in the Articles and serve important operational purposes.

The renminbi is currently “widely used” and “widely traded”.

Will Gold Be Included In The SDR Basket? 

China gold x

The reason the current IMS is up for revision is because the global fiat experiment has failed miserably. Having exclusively fiat currencies circulating within countries, without any anchor to a non-fiat reserve currency, is simply not sustainable. In shaping a new IMS the designers would be mistaken to create a system based on a basket of solely fiat currencies, which have just proven to be ineffectual. Gold could provide credibility and strength to the SDR.

In addition, we could read some clues (in my prior post) that the Chinese would like gold in the SDR along side the national fiat currencies. This would explain China’s aggressive gold purchases in recent years.

On March 9, 2015, Albert Cheng, managing director of the World Gold Council Far East, was interviewed by ShanghaiDaily.com:

Q: The council has signed an understanding agreement with the Shanghai Gold Exchange to work more closely via the International Board set up in the city’s pilot Free Trade Zone last September. Could you tell us how that will work?

A: The memorandum of understanding involves objectives to improve operation of the Shanghai Gold Exchange, such as attracting more international players. Gold is a hard currency, so if it is freely traded in China, it will have an impact on the yuan. The design of the International Board, allowing international and domestic investors to participate in the onshore gold market, has a symbolic meaning of some kind of convertibility. By signing the memorandum, we can help the Board marketing this concept to the international trading community.

In general the renminbi is not yet fully convertible, but in terms of gold it is; through the Shanghai International Gold Exchange. Logically all currencies in the SDR basket must be freely usable, and allowed to be freely exchanged for one another. If the renminbi and gold were to be added to the SDR basket it would help if there is an exchange for both, which is currently operating in the Shanghai Free Trade Zone.

Will the Shanghai International Gold Exchange facilitate gold inclusion into the SDR?

Xinhua: China And Germany Deepen Financial Cooperation, Germany Joins AIIB And Supports RMB Inclusion Into SDR

Guest Post

BERLIN, March 17 (Xinhua)China and Germany conducted their first high-level financial dialogue here on Tuesday and agreed to strengthen macro-economic policy coordination, develop policy dialogue and pragmatic cooperation in fiscal and financial areas.

Representing China at the first China-Germany High Level Financial Dialogue, Chinese Vice Premier Ma Kai said the dialogue was established after a decision reached by leaders from both countries during Chinese President Xi Jinping’s visit to Germany last year. The main task of this dialogue is to implement agreements reached by leaders of the two countries, he added.

Ma said that confronted with a complex and fragile global economic situation, China and Germany as important economies should strengthen policy coordination, coordinate strategic cooperation, deepen financial and fiscal cooperation, consolidate and develop the positive momentum of both economies to make further contributions to the steady growth of the world economy.

Representing Germany at the dialogue, German Finance Minister Wolfgang Schaeuble and Deutsche Bundesbank President Jens Weidmann said that Germany and China have been working together very well both bilaterally and multilaterally in financial and fiscal areas.

The formal launch of the high-level financial dialogue will help expand bilateral dialogue and avoid risks in this important area and promote bilateral relations, they said.

Both leaders also said that Germany is paying great attention to the huge success of the Chinese economy as well as the rising influence of Chinese currency renminbi (RMB) on the world market. They expressed hope that both sides could expand bilateral investment and keep deepening their comprehensive strategic partnership.

Both sides spoke of the dialogue mechanism as an important platform for bilateral communication and policy coordination on strategic, overarching and long-term issues in financial fields.

Leaders said they are committed to strengthening macro-economic policy coordination in the G20 context, developing policy dialogue and pragmatic cooperation in fiscal and financial areas in a bid to jointly support global economic growth and improve global economic governance.

According to a joint statement after the dialogue, the German side will actively support China in hosting the G20 summit in 2016 and supports China’s goal to add the RMB to the special drawing rights (SDR) currency basket based on existing criteria.

Germany also announced at the dialogue its intention to join the Asia Infrastructure Investment Bank (AIIB) as a prospective founding member. China welcomed this intention.

During the dialogue, both sides reached consensus on issues such as investment cooperation between China and Europe, China and Germany and in third countries.

Both sides welcomed each other’s banking institutions setting up establishments or developing business operations in their respective markets and plan to hold consultations on bank supervision.

China and Germany also support the establishment and development of an offshore RMB market and a local RMB clearing bank in Frankfurt and welcome German financial institutions using RMB qualified foreign institutional investors (RQFII) quota to invest in China’s markets.

The joint statement said that both sides would support Chinese securities and futures institutions in cooperating with German institutions to establish and conduct business in Germany, including the development, distribution and portfolio management of RQFII products.

China has approved Deutsche Asset & Wealth Management Investment GmbH’s application for RQFII qualification. Both sides supported the Shanghai Stock Exchange, the China Financial Futures Exchange and the Deutsche Boerse Group’s plan to co-establish a RMB offshore platform to trade financial instruments in Frankfurt.

Officials from China and Germany attending the financial dialogue reached consensus on the direction of future strategic cooperation and exchanged views on the macro-economic situation in China and Europe.

Ma and Schaeuble held a joint press conference after the dialogue and later attended a working lunch with Chinese and German business leaders.

Ma also attended a discussion on Industry 4.0 at the Fraunhofer Institute for Production Systems and Design Technology in Berlin on Tuesday.

China, Gold, SDRs And The Future Of The International Monetary System

Possibly China’s national currency will be part of the IMF’s Special Drawing Rights (SDR) this year. If so, this would have substantial implications for the international monetary system.

Currently the SDR, which was invented in 1969 right after the London Gold Pool collapsed, consists of US dollars (41.9 %), Euros (37.4 %), Pound sterling (11.3 %) and the Japanese yen (9.4%). The weights assigned to each currency in the SDR are adjusted to take into account their prominence in terms of international trade and national foreign exchange reserves.

China has been interested in SDRs at least since the seventies, but became more outspoken in 2009, when Zhou Xiaochuan, Governor of the People’s Bank of China (PBOC), called for replacement of the US dollar as the world reserve currency by the SDR as to achieve the objective of safeguarding global economic and financial stability. China is currently the second largest economy in the world and its wishes can ultimately not be denied by other major economies. From Zhou:

… the role of the SDR has not been put into full play due to limitations on its allocation and the scope of its uses. However, it serves as the light in the tunnel for the reform of the international monetary system.

A super-sovereign reserve currency not only eliminates the inherent risks of credit based sovereign currency, but also makes it possible to manage global liquidity.

Special consideration should be given to giving the SDR a greater role. The SDR has the features and potential to act as a super-sovereign reserve currency.

Further improve the valuation and allocation of the SDR. The basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies, and the GDP may also be included as a weight. The allocation of the SDR can be shifted from a purely calculation-based system to a system backed by real assets, such as a reserve pool, to further boost market confidence in its value.

More present, on March 12, 2015, PBOC official Yi Gang said he’s “actively communicating” with the IMF on including the renminbi in the basket of the SDR.

We hope the IMF can fully take into account the progress of renminbi internationalization, to include the renminbi into the basket underlining the SDR in foreseeable, near future.

It should be noted the IMF and the PBOC started communicating long before 2015. For example; since 2013, every year in March, the IMF and the PBOC hold a joint conference in Beijing on “…new issues in monetary policy in an international context and assess their relevance for China. Against the backdrop of the global financial crisis and the use of unconventional monetary policy, it will look at the implications for monetary policy frameworks, as well as the changing toolkit of central banks.” The conference brings together international experts, Chinese academics, PBOC and IMF staff.

Click here for the full transcripts of the 2013 conference, here for the 2014, and here for the March 16, 2015, program.

One of the speakers at the 2014 conference was Dr. Wang Yu, Deputy Director General, Bureau of Research at the PBOC. His biography states:

During his tenure at the People’s Bank of China, Dr. Wang participated in the creation of China’s monetary policy framework and the building of the Chinese financial market. He is involved in market based interest rate reform, exchange rate reform, as well as the convertibility of capital account. Dr. Wang participated in the formulation of rules and development of trading tools for the Chinese currency and gold markets. Dr. Wang’s work supports the opening up of the Chinese financial market to the world,

Every five years the SDR basket is reconsidered, the previous reconsideration was in 2010. The IMF’s Managing Director, Christine Lagarde, will be in China from March 19 to 23, 2015, “among other things, she’ll be meeting with the authorities and participating in the China Development Forum.” Will she talk about the acceptance of the renminbi into the SDR basket? Yes. From the Press Briefing by Gerry Rice, Director, IMF Communications Department, March 12, 2015:

QUESTIONER: Gerry, on her [Lagarde] trip to China, will the Managing Director be having any discussions regarding potentially including the renminbi to the SDR basket? There were some statements out of Beijing today by a senior Chinese official saying that they are having those discussions and they seemed optimistic. Is that on her agenda?

RICE: Yeah, I’m not sure what the actual discussions will be but maybe it will help if I just sort of set the issue a bit in context, the issue that you’re raising.

Again, just stepping back, the IMF’s Board reviews the SDR valuation every five years unless an earlier review is warranted by global financial or economic development. So it’s essentially every five years. So the last review took place in late 2010. And the next one is scheduled then for later this year in the latter part of 2015.

And then, the updated SDR basket would become effective January 1, 2016. So that’s kind of the review schedule, okay?

Then the criteria for inclusion of a currency in the SDR basket, the selection of currencies for the SDR basket are based on two criteria and these were set out some time ago. They are namely the size of a country’s exports and whether its currency is freely usable. So at the time of the last SDR review that was in 2010, as I said, the renminbi met the export criterion but it was assessed to not meet the freely usable criterion.

Since then, of course, there have been a number of developments regarding the RMB’s international use and so, just to circle back, the upcoming review will take stock of these developments. So that’s something that’s going to be happening toward the end of the year as I said and I’m sure there will be discussions in various fora in the run up to that date. 

On the term from the IMF for a currency to be freely usable, in order to be allowed into the SDR basket, we must not commingle this with fully convertible. As was outlined in the paper International Reserves And Foreign Currency Liquidity, from the IMF in 2013:

A7.15 Currently the IMF does not maintain a list of convertible currencies. In 1978, the Second Amendment of the IMF’s Articles of Agreement entered into effect and the concept of “convertible currencies” was replaced by the term “freely usable currency,” 

According to Criteria for Broadening the SDR Currency Basket, an IMF paper published in 2011, “that discusses a number of reform options for the eligibility criteria for the SDR currency basket”, this does not exclude the renminbi:

The freely usable concept and its two key elements—currencies should be “widely used” and “widely traded” —are set out in the Articles and serve important operational purposes. A formal requirement for a currency to be freely usable was adopted for SDR valuation only in 2000, although considerations relating to this concept had been taken into account earlier. Indicators for assessing freely usable currencies were first discussed in 1977, and are updated to reflect subsequent developments in financial markets and data availability.

Over the last few years, China’s authorities have steadily loosened capital controls, allowing the renminbi to become the fifth most popular currency for settling global payments. With at least 60 central banks now including the renminbi among their foreign reserves. In October 2014, the UK issued the Western world’s first sovereign renminbi bond. This adds to London’s design to make the City the pre-eminent offshore trading center for the currency as the restrictions on non-domestic use are weakened. All in all, the renminbi is currently “widely used” and “widely traded”.

Furthermore, from Criteria for Broadening the SDR Currency Basket:

At their April 2011 meetings, the IMFC and the G-20 Ministers called for further work on a criteria-based path to broaden the composition of the SDR basket.

Directors have also noted that expanding the SDR basket to major emerging market currencies under appropriate conditions, and based on transparent criteria, could further expand the role of the SDR in the international monetary system.

What other major emerging market currency could they hint at next to the renminbi? Not only China has a desire for its currency to be adopted into the SDR, more G-20 members have an interest into broaden the composition of the SDR basket.

Zooming in on the characteristics of freely usable currency is interesting. From International Reserves and Foreign Currency Liquidity:

A7.18 For the recording of reserve assets, BPM6 states that “reserve assets must be denominated and settled in convertible foreign currencies, that is, currencies that are freely usable for settlement of international transactions” (BPM6, paragraph 6.72). Such currencies potentially extend beyond those currencies determined to meet the ‘freely usable currency” criterion under Article XXX (f) of the IMF’s Articles of Agreement. Countries are required to disclose at least once each year the composition of reserves by groups of currencies (item IV.(2)(a) of the Reserves Data Template). The overwhelming majority (well over 95 percent at the present time) of reserve assets reported in the Reserves Data Template are denominated in the freely usable currencies determined by the Fund under Article XXX (f) (i.e., the currencies currently included in the SDR basket).

It’s likely that if the renminbi were to be adopted into the SDR, China would have to show the composition of reserves by groups of currencies (item IV.(2)(a) of the Reserves Data Template). If we head over to the IMF webpage of the Data Template on International Reserves and Foreign Currency Liquidity, we can see many countries listed, but not China.  Additionally, from the Articles of Agreement of the International Monetary Fund:

Section 5.  Furnishing of information

(a) The Fund may require members to furnish it with such information as it deems necessary for its activities, including, as the minimum necessary for the effective discharge of the Fund’s duties, national data on the following matters:

(i) official holdings at home and abroad of (1) gold, (2) foreign exchange;

(ii) holdings at home and abroad by banking and financial agencies, other than official agencies, of (1) gold, (2) foreign exchange;

(iii) production of gold;

Currently the PBOC can hide some of its gold holdings at China’s largest sovereign wealth fund SAFE, a subsidiary of the PBOC, which “is responsible for the supervision and management of the foreign exchange market of China, to undertake supervision and management of the settlement and sale of foreign exchange and to cultivate and develop the foreign exchange market.” In short, SAFE is financial agency able to buy gold as a proxy for the PBOC. The IMF may require China to furnish information about its official gold holdings, as well as gold holdings by banks and financial agencies. If China would disclose all this information this would be a huge revelation, as China has net imported thousands of tonnes of gold in recent years that have not been officially assigned to any lawful owner. The financial industry has till thus-far assumed the gold is somewhere in China, but it’s unknown who’s holding it.

The PBOC publishes data on total FX reserves and gold, but without any specifications. These tables from the PBOC website…

PBOC FX and China Gold

can be translated into …

PBOC FX and China Gold english

These numbers are about as much as I can find on the IMF’s website about Chinese reserves (excluding TIC data).

Screen Shot 2015-03-16 at 1.45.05 PM
Reserves China, source: IMF

Total Reserves China excluding gold

It’s safe to assume PBOC gold reserves at 33.89 million ounces (1.054 tonnes) are not accurate as there is circumstantial evidence the PBOC has been buying gold in recent years through proxies.

In May 2015, there will be an informal SDR basket review, in October the basket will be revised officially.

But there is more…

OMFIF, a well-connected economic think tank, in conjunction with the World Gold Council has released a report in January 2013 titled, Gold, the renminbi and the multi-currency reserve system. One of the writers of the report was Chairman Meghnad Desai, Emeritus Professor, London School of Economics:

When it comes to international monetary reform, well before the renminbi advances to fully-fledged reserve currency status, gold might stand to reclaim a right to which it has long aspired by returning to the heart of the system. Rebuilding and reinforcing the Special Drawing Right (SDR), the IMF’s composite currency spawned in the 1960s, have been much mooted, but nothing has been done to realize this aim.

I favor extending the SDR to include the R-currencies – the renminbi, rupee, real, rand and ruble – with the addition of gold. This would be a form of indexation to add to the SDR’s attractiveness. Gold would not need to be paid out, but its dollar or renminbi or ruble equivalent would be if the SDR had a gold content. By moving counter-cyclically to the dollar, gold could improve the stabilizing properties of the SDR. Particularly if the threats to the dollar and the euro worsen, a large SDR issue improved by some gold content and the R-currencies may be urgently required.

In its absence, we may face a huge liquidity crunch if a combination of US and European shortcomings and the natural ambitions of Asia produce an attack on the major currencies – and open up a further hole in the framework of the world’s reserve currency arrangements.

As the international community attempts to take on these challenges, gold waits in the wings. For the first time in many years, gold stands well prepared to move once more towards the centre-stage. This could be the start of an immensely important phase in the history of world money. 

What do the Chinese think about this idea? Well, we’re familiar with their official policy of accumulating physical gold by the PBOC and the citizenry, more hints we can find from less official sources. According to a report from the Chinese Research Centre For International Finance, February 1, 2013:

This paper concentrates on the issue of currency convertibility in the context of Chinese strategy of the RMB internationalization. It argues that the motive for that strategy was ignited by China’s dissatisfaction with the long lasting unstable international monetary system. The recent global financial crisis intensified China’s urge to get rid of the “dollar trap” and look for a diversified international reserve currency system where the Chinese renminbi could take a place.

Looking elsewhere, there seems limited ‘high quality’ paper money in the world. The public debt in G7 countries has reached the highest level of 60 years. The traditional alerting ratio of 60% is no longer applied. Fiat money seems to have encountered a confidence crisis. The SDR, a collective form of currencies under the IMF’s account has been put under the spot light along with Stiglitz’s proposal. The proposal aimed to enlarge the SDR’s role as a supplement to the US dollar under the supervision of the IMF. However, there has been no consensus reached among the IMF member countries. Apart from paper currencies, gold has become a popular hedge instrument in the market. It has also drawn attention of its possible role to play in the reform of international monetary system.

In 2011, Chatham House set up a global Taskforce of experts to assess the possible role that gold could play, including an anchor, a hedge or safe haven, collateral or guarantee and a policy indicator.

The world is now in the transition from the US dollar hegemony to a diversified reserve currency system. China, among many other countries, is looking for dollar’s alternatives and its own currency is certainly one candidate for consideration.

One of the members of the Chatham House global Taskforce was … Meghnad Desai, who is also Chairman for OMFIF. Small world. In its research the taskforce was greatly helped by the “Chinese Academy of Social Sciences (CASS), and Professor Yu Yongding and Mr Zhang Yuyan.” Could it be there is a team of academics and policy makers around the world working behind the scenes to reform the international monetary system by adding, among other currencies, the renminbi and gold to the SDR?

Will Gold Be Part Of A New International Monetary System?

Anyone who has been paying attention to the global economy the past years can agree with me our central bankers have conducted miserable monetary policy and have taken insufficient measures to fight crises. All major economies have embarked in printing unprecedented quantities of money, but the only thing they bought was time. Quantitative easing on such a scale is like kicking the can determined to reach the end of the road. The future looks anything but sanguine.

Where is this going? Are our leaders truly gonna allow for the international monetary system to implode? Is there no plan B? And we are supposed to believe gold isn’t of any significance in economics?

In our current highly unstable economic environment the price of gold is relatively low, according to gold proponents like me. In addition, we can see immense flows of physical gold going from West to East that are guaranteed not to return in the foreseeable future. If the price of gold isn’t suppressed, my previous two observations can only be explained as physical supply outstripping demand since April 2013 – when the price of gold declined substantially to its current relative low levels. But perhaps there is more than meets the eye.

I would like to share a theoretical explanation for the observations just mentioned, supported by historic diplomatic documents that provide some guidance through the present fog.

Let’s start just before gold was removed from the system:

In the sixties France stepped out of the London Gold Pool, as it didn’t want to waste any more gold on the war the US was waging against Vietnam. The London Gold Pool was a joint effort by the US, the Netherlands, France, Germany, Italy, Belgium, Switzerland and the UK to peg the price of gold at $35 an ounce. But because the US was printing dollars to finance the war in Vietnam – this devalued US dollars – a lot of gold was required to be sold to maintain the price at $35. Shortly after France left the Pool it collapsed in March 1968. From the IMF:

While the total number of U.S. dollars circulating in the United States and abroad steadily grew, the U.S. gold reserves backing those dollars steadily dwindled. International financial leaders suspected that the United States would be forced either to devalue the dollar or stop redeeming dollars for gold.

The dollar problem was particularly troubling because of the mounting number of dollars held by foreign central banks and governments: In 1966, foreign central banks and governments held over 14 billion U.S. dollars. The United States had $13.2 billion in gold reserves, but only $3.2 billion of that was available to cover foreign dollar holdings. The rest was needed to cover domestic holdings. If governments and foreign central banks tried to convert even a quarter of their holdings at one time, the United States would not be able to honor its obligations.

The Incredible Shrinking Gold dollar IMF

And that is exactly what happened; in 1971 the US closed the gold window, no longer could foreign central banks convert dollars into gold (except on the open market). As I’ve written before: (i) Europe, most notably France was not amused and wanted to revalue gold, (ii) the US was very persistent to completely phase out gold from the monetary system in order to leverage the power of the US dollar hegemony.

I’ve found documents that connect the past with the present. On February 24, 1970, French President Pompidou met with US President Nixon in Washington DC. The oncoming quotes are from the US minutes of the meeting:

Turning to France, the President [Pompidou] said he wished to emphasize again that – as distinguished from the positions of some of his predecessors in this office – he would not comment on the independent French policy. He might have his own views but he felt that a strong independent France devoted to the same goals as we are is in the interest of the US. A strong Europe in the economic sense might seem not to be in the US interest, in the long term it was. What we need is a better balance in the West. It is not healthy to have just two superpowers; in such a situation there is more chance of a conflict than when there are more centers of power. Greater strength of the European economies, an independent French policy, and, in Asia, a stronger Japan, would eventually make for a more stable world. The position of the U. S. at the end of World War II was not healthy. Twenty-five years had passed and things were changed. This we regarded as a healthy development.

In the final analysis with three billion people on earth if civilization is to survive … this will be decided by the Soviet Union, by China, and eventually Japan, by Western Europe, by that he meant France, Britain and Germany and the United States. Africa is moving along, but it is a century away.

Latin America is also moving but it is fifty years or more away. In Asia, India and Pakistan will have enormous difficulty in simply keeping pace with their increase in population. We have a great responsibility to use the power we have to build the kind of a world that keeps the forces of expansion in check and thus give the forces of freedom a chance to grow in their own way and not like tin soldiers lined up behind the biggest one.

Pompidou’s idea was clearly to spread economic power across the globe for a more balanced, peaceful and prosperous world. We can also read the first signs of a unified Europe between the lines. Pompidou is one of the best forecasters I’ve ever read, what he said 45 years ago has more or less happened by now. However, Pompidou’s ideology could not coexist along the dollar hegemony. The US, therefor, embarked in divide and conquer, a notorious strategy to gain and maintain power. The next quotes are from a telephone conversation on March 14, 1973, between Henry Kissinger, National Security Advisor, and William Simon, Under Secretary of the Treasury: 

K: … I’ve just been called to the President. Let me tell you — Shultz has sent me a copy of the cable that Volker gave him – that Volker sent him about the interventions, and he has asked for my views. I basically have only one view right now which is to do as much as we can to prevent a united European position without showing our hand.

S: Okay. Well, I interpret that as less intervention, which is a good idea, and I think George will be very happy with that comment. Do as much as we can to prevent a unified European position.

K: I don’t think a unified European monetary system is in our interest. I don’t know what you think for technical reasons, but these guys are now helping to put it to us.

S: Yes, sir.

K: I don’t know whether that’s true in the short term, but I’m convinced that that’s true in the long.

S: I just agree with you a thousand percent.

K: So I’d rather play with them individually. You know, if it were a question of supporting an individual currency, I’d be much more inclined to do that.

S: Yes, such as the mark.

K: That’s right.

S: Yes, sir.

K: Does that make sense to you?

S: Yes it does.

K: You understand, my reason’s entirely political, but I got an intelligence report of the discussions in the German Cabinet and when it became clear to me that all our enemies were for the European solution that pretty well decided me.

S: Yes, sir. Well, I pass. I’m going to be talking to George on the telephone.

K: Be careful. Everything in Bonn is tapped.

S: I promise you I will.

Next, from Wikileaks, a report of a meeting held by all European Ministers of Finance about gold, written to the American Ministry Of Foreign Affairs on April 23, 1974 (Europe and the US were debating this issue for a few years):

MADE IN A WIDER INTERNATIONAL CONTEXT, WHAT CAME OUT OF ZEIST WAS A CONSENSUS ON CERTAIN SUBSTANTIVE PROPOSITIONS THAT ARE TO BE FURTHER EXPLORED BEFORE THEY ARE SUBMITTED TO A NEXT MEETING OF THE COUNCIL OF MINISTERS OF THE EEC [EU]. IF AT A LATER STAGE THE COUNCIL REACHES AGREEMENT ON A CERTAIN POSITION, THE FURTHER PROCEDURE COULD BE THAT THE EUROPEAN COMMUNITY FORMULATES A FORMAL PROPOSAL ON HOW TO DEAL WITH THE PROBLEM OF GOLD IN THE PERIOD BEFORE THE REFORM OF THE INTERNATIONAL MONETARY SYSTEM.

IN ZEIST, MINISTERS HAVE AGREED ON TWO GENERAL PROPOSITIONS. FIRST, THEY HAVE RE-ASSERTED THAT THE SDR SHOULD BECOME THE PRINCIPAL RESERVE ASSET IN THE FUTURE SYSTEM, AND THAT ARRANGEMENTS FOR GOLD IN THE INTERIM PERIOD SHOULD NOT BE INCONSISTENT WITH THAT GOAL. SECOND, THEY HAVE AGREED THAT SUCH INTERIM ARRANGEMENTS SHOULD ENABLE MONETARY AUTHORITIES TO EFFECTIVELY UTILIZE THE MONETARY GOLD STOCKS AS INSTRUMENTS OF INTERNATIONAL SETTLEMENT.

THERE WAS A CONSENSUS AMONG MINISTERS THAT AN INCREASE OF THE OFFICIAL GOLD PRICE, ALTHOUGH IT MIGHT SERVE THE SECOND OBJECTIVE, WOULD BE INCONSISTENT WITH THE FIRST. IN ORDER TO MOBILIZE MONETARY GOLD AS AN INTERNATIONAL RESERVE ASSET, THEY HAVE AGREED THAT:

1) MONETARY AUTHORITIES SHOULD BE PERMITTED TO BUY AND TO SELL GOLD BOTH AMONG THEMSELVES, AT A MARKED-RELATED PRICE, AND ON THE FREE MARKET. THE MONETARY AUTHORITIES WOULD HAVE COMPLETE FREEDOM TO BUY OR TO SELL GOLD, AND WOULD HAVE NO OBLIGATION WHATEVER TO ENTER INTO ANY PARTICULAR TRANSACTION.

2) CERTAIN DELEGATIONS ARE OF THE OPINION THAT GOLD TRANSACTIONS WITH THE FREE MARKET SHOULD NOT, OVER A CERTAIN PERIOD OF TIME, LEAD TO A NET INCREASE OF THE COMBINED OFFICIAL GOLD STOCKS.

3) IN ORDER TO APPLY THESE PRINCIPLES, VARIOUS PRACTICAL SOLUTIONS CAN BE ENVISAGED. TWO WERE MENTIONED IN PARTICULAR. ONE IS THAT MONETARY AUTHORITIES PERIODICALLY FIX A MINIMUM AND A MAXIMUM PRICE BELOW OR ABOVE WHICH THEY WOULD NOT SELL OR BUY ON THE MARKET. THE OTHER CONSISTS IN CREATING A BUFFER STOCK TO BE MANAGED BY AN AGENT WHO WOULD BE CHARGED BY THE MONETARY AUTHORITIES TO INTERVENE ON THE MARKET SUCH AS TO ENSURE ORDERLY CONDITIONS ON THE FREE MARKET FOR GOLD.

Now we know what Europe was planning in seventies, this explains a lot better what occurred later on. Remember the Washington Agreement On Gold? Just before the euro was introduced in 1999, all European central banks collaborated in a program called the Central Bank Gold Agreements (CBGA), or the Washington Agreement On Gold, to jointly manage gold sales. (note, Eurozone aggregated gold reserves currently still transcend US reserves)

Central Bank Largest Sellers

In 1991 the Dutch central bank (DNB) held 1,700 tonnes in official gold reserves, currently it holds 613 tonnes. When the Dutch Minister Of Finance, J.C. de Jager, was questioned about these sales in 2011 he answered:

Question 6:  Can you confirm that since 1991 DNB has sold 1,100 tonnes of the 1,700 tonnes it owned…

Answer 6: Since 1991 DNB sold 1,100 tonnes. At the time DNB determined that from an international perspective it owned a lot of gold proportionally. It decided to equalize its gold holdings relative to other important gold holding nations. 

Right, so since the seventies Europe wanted to spread economic power across the globe, replace the dollar as the world reserve currency and sold parts of its official gold reserves “to equalize its gold holdings relative to other important gold holding nations. These types of plans aren’t realized overnight; it can take decades, it can even take more decades than estimated. Who knows? We can be in the final stage right now.  

Not so long ago I published a Wikileaks cable from 1976 wherein China expresses its particular interest in gold and SDR’s. Of course this is all just a theory, but it seems as if the redistribution of the chips, physical gold flowing form West to East, is all part of orchestrated preparations for the next international monetary system, anchored by gold. This system would require gold to be spread among the major economic power-blocks proportionally. 

Chinese mining 1949-2014 x

Total Estimated Chinese Gold Reserves 1995 - 2014

Jean-Claude Trichet, former president of the European Central Bank, said on November 4, 2014:

The global economy and global finance is at the turning point in a way, …new rules have been discussed not only inside the advanced economies, but with all emerging economies, including the most important emerging economies, namely, China.

 

Gold world

 

(h/t Freegold)

historic documents:

1970 February 24, Washington DC, US. Pompidou and Nixon. 

1971, October 28. Phone call between Nixon and Kissinger on gold.

1971, December 13 & 14, Azores. Negotiations between Kissinger and Pompidou about the value of currencies and gold.

1973, March 14, Kissinger and Simon telephone conversation. 

1973, May 18, Paris, France. Meeting Kissinger And Pompidou on value of gold.

1974, March 6, Washington, US. Note From the Deputy Assistant Secretary of State for International Finance and Development (Weintraub) to the Under Secretary of the Treasury for Monetary Affairs (Volcker): GOLD AND THE MONETARY SYSTEM: POTENTIAL US–EU CONFLICT.

1974, April 22 & 23, Zeist, The Netherlands. Meeting European Ministers Of Finance On Gold.

1974, April 25. Minutes of Secretary of State Kissinger’s Principals and Regionals Staff Meeting on gold.

Wikileaks 1976: PBOC Focussed On Gold & SDR’s

Another piece of the puzzle.

The next Wikileaks cable is a summary of a meeting that took place in October 1976 between, among others, chairman of the Federal Reserve, Arthur Burns, and a delegation of Chinese bankers from the PBOC. For the record, this was five years after Nixon suspended US dollar convertibility into gold and one month after Mao Zedong passed away.

Most notably the Chinese stated they see inflation as economic weakness and particularly expressed their interest in IMF gold auctions and the issuance of SDR’s. Sounds to me the PBOC was particularly not very enthusiastic about the US dollar as the world’s reserve currency in 1976.

Inflation in China has not been close to zero since 1976, nor did they adopt a form of gold standard in the seventies. However, this can all have been according to plan. If China had any ambitions in the late seventies to move away from the dollar and become an economic powerhouse, perhaps they decided it was best to first grow and develop within the existing system before making a change, because this is exactly what happened:

China’s communist economy started to open in the late seventies when Deng Xiaoping ruled the country and implemented the socialist economy; combining the Party’s socialist ideology with a pragmatic adoption of market economic practices. In recent decades China has been the growth wonder of the world making them currently the second largest economy right after the US. In 2002 China reformed its gold market and ever since is effectively stimulating its citizens to save in physical gold, making the People’s Republic the largest gold producer and consumer on earth. Additionally, China is openly calling for replacing the US dollar as the world reserve currency. Did this all adventitiously happen or was it carefully planned many years ago?

Nixon and Deng Xiaoping
Carter, Nixon and Deng Xiaoping

In Mao’s era, from 1949 until 1976, Chinese yearly domestic gold mine production increased 261 %, from 1976 until present production increased 2,964 %.  

Chinese mining 1949-2014 x

In 1977 for the first time China disclosed their official gold reserves at 395 tonnes, according to the World Gold Council. Since then there have been three increases; 105 tonnes in 2001 (to 500 tonnes), 100 tonnes in 2003 (from 500 to 600) and 454 tonnes in 2009 (from 600 to 1,054 tonnes). Given the fact the PBOC is not buying such amounts in one month, but more likely spread over the years, my assumption is that the official amount disclosed by the PBOC reflects more about China’s political strategy than tonnes in reserve. China claims to have 1,054 tonnes currently, though there is overwhelming evidence they have substantially more in official reserves.

Chinese official gold reserves

From Wikileaks:

1. SUMMARY: CALL OF CHAIRMAN BURNS ON PU MING, DEPUTY DIRECTOR OF THE PEOPLE’S BANK OF CHINA AND LIN CHI-HSIN, DEPUTY GENERAL MANAGER OF THE BANK OF CHINA COVERED A WIDE VARIETY OF AMERICAN, CHINESE, AND INTERNATIONAL FINANCIAL MATTERS IN THREE-HOUR MEETING. POLITICAL QUESTIONS AND SINO-US BILATERAL RELATIONS DID NOT COME UP. CHINESE EVIDENTLY WERE VERY PLEASED WITH DISCUSSIONS, WHICH USLO CONSIDERS A SUCCESSFUL INTRODUCTION OF US AND PRC CENTRAL BANKING LEADERS.

2. CHAIRMAN BURNS OF THE FEDERAL RESERVE BOARD, ACCOMPANIED BY NORMAN BERNARD OF THE FED. AND USLO OFFICER, CALLED OCTOBER 11 ON PU MING (0592/2494), DEPUTY DIRECTOR OF THE PEOPLE’S BANK OF CHINA, LIN CHI-HSIN (2651/1015/9387), DEPUTY GENERAL MANAGER OF THE BANK OF CHINA, LIU PEN-KUN (0491/2609/2492), DEPUTY DIRECTOR OF THE BANKING DEPARTMENT OF THE BANK OF CHINA, AND TWO NOTETAKERS. THE MEETING LASTED THREE HOURS, AND ALL FOUR OF THE CHINESE MENTIONED ABOVE TOOK PART, LIU, SERVING AS INTERPRETER, BUT SOMETIMES DISCUSSING THE QUESTION BEFORE HE TRANSLATED IT.

3. THE CHINESE ASKED A VARIETY OF QUESTIONS ON THE CONDITION OF THE US ECONOMY, INCLUDING INTEREST RATES, LOANS, THE STATE OF THE RECOVERY OF THE ECONOMY, HOUSING STARTS, UTILIZATION OF CAPITAL, AND THE RATE OF INFLATION AND THE INCREASE IN THE MONEY SUPPLY. THE CHINESE WERE WELL INFORMED ON THE US ECONOMY, AND APPARENTLY HAD DISCUSSED THEIR QUESTIONS BEFORE THE MEETING. THEY WERE OBVIOUSLY PLEASED WITH THE FRANK AND STRAIGHT ANSWERS GIVEN THEM.

4. IN INTERNATIONAL ECONOMICS, THE DISCUSSION CONSISTED MAINLY OF QUESTIONS BY THE CHINESE AND ANSWERS BY DR. BURNS, ALTHOUGH THE CHINESE VIEW THAT INFLATION IS A SYMPTOM OF ECONOMIC WEAKNESS CAME THROUGH CLEARLY. THE CHINESE ASKED ABOUT DR. BURNS’ VIEWS OF THE IMF CONFERENCE AND WERE PARTICULARLY INTERESTED IN THE IMF GOLD AUCTIONS, AND THE ISSUANCE OF SDR’S. THE CHINESE ASKED ABOUT THE PROBLEM OF CONTROLLING THE $200 BILLION IN EURODOLLARS, AND GAVE THE IMPRESSION THAT THEY CONSIDERED THE EURODOLLAR MARKET A THREAT TO EXCHANGE RATE STABILITY, WHICH BY IMPLICATION THEY SEEMED TO FAVOR. THEY ALSO ASKED ABOUT COMPARATIVE GROWTH RATES AMONG THE OECD COUNTRIES. AGAIN, THE CHINESE BANKERS WERE WELL INFORMED AND HAD THEIR QUESTIONS WELL PREPARED.

5. DR. BURNS ASKED A NUMBER OF QUESTIONS ABOUT CHINESE FINANCING. IN THEIR REPLY ON HOW THE PRC FIXES EXCHANGE RATES, THE CHINESE WERE OBVIOUSLY DODGING, BUT CONFIRMED THAT THE RMB, AS A STABLE CURRENCY, TENDS TO FOLLOW THE STRONG CURRENCIES, SUCH AS THE DEUTSCHE MARK, AND PAYS CLOSE ATTENTION TO IMPORTANT CHINESE TRADING CURRENCIES SUCH AS THE YEN. MR. PU OUTLINED THE WORKING OF THE CHINESE BANKING SYSTEM, NOTING THE DIVISION OF LABOR BETWEEN THE PEOPLE’S BANK OF CHINA (THE CENTRAL BANK), THE BANK OF CHINA (FOREIGN EXCHANGE BANK), AND THE PEOPLE’S CONSTRUCTION BANK (INVESTMENT AND CONSTRUCTION BANK). THERE IS NO BANK OF AGRICULTURE NOW FUNCTIONING. MR. PU’S STATEMENTS CONFIRMED THAT CHINESE MONETARY POLICIES ARE VERY RESTRICTIVE, WITH ALL BUDGETS AT A BALANCE OR WITH A SLIGHT SURPLUS, AND THE ISSUANCE OF EACH NEW RMB BACKED BY EIGHT RMB IN COMMODITIES. HE SAID THAT MONEY SUPPLY IN CHINA MEANS CURRENCY IN CIRCULATION ONLY, AND DOES NOT INCLUDE PAYMENTS BY CHECK FROM ONE ENTERPRISE TO ANOTHER.

6. NO POLITICAL SUBJECTS OR BILATERAL US-PRC QUESTIONS CAME UP IN THE DISCUSSIONS. THE CLOSEST APPROACH TO POLITICS WAS MR. PU’S FAREWELL REMARK THAT HE WAS SURE THAT NORMALIZATION OF RELATIONS WOULD GIVE AN EVEN GREATER IMPETUS TO EXCHANGES OF VIEWS BETWEEN THE US AND CHINESE CENTRAL BANKS.

7. THE CHINESE BANKERS WERE EVIDENTLY PLEASED WITH THE VISIT, AS THE THREE HOURS OF CONVERSATION AND THE FACT THAT BOTH THE PEOPLE’S BANK OF CHINA AND THE BANK OF CHINA WERE REPRESENTED SHOW. THE MEETING WAS CORDIAL THROUGHOUT, AND DR. BURNS’ FRANK AND INFORMATIVE ANSWERS WERE MUCH APPRECIATED. USLO CONSIDERS THAT DR. BURNS’ VISIT WAS A SUCCESSFUL INTRODUCTION OF TOP US AND CHINESE CENTRAL BANKERS.

Previously posted historic documents:

1971, October 28. Phone call between Nixon and Kissinger on gold

1971, December 13 & 14, Azores. Negotiations between Kissinger and Pompidou about the value of currencies and gold

1973, May 18, Paris, France. Meeting Kissinger And Pompidou on value of gold

1974, March 6, Washington, US. Note From the Deputy Assistant Secretary of State for International Finance and Development (Weintraub) to the Under Secretary of the Treasury for Monetary Affairs (Volcker): GOLD AND THE MONETARY SYSTEM: POTENTIAL US–EU CONFLICT

1974, April 22 & 23, Zeist, The Netherlands. Meeting European Ministers Of Finance On Gold

1974, April 25. Minutes of Secretary of State Kissinger’s Principals and Regionals Staff Meeting on gold

Will This Be A New World Reserve Currency?

In the Pacific there has been a currency exchange system since 2009 that allows individuals to sent funds directly to each other. Payments in the same currency can be made instant and free of charge, swapping currencies takes no more than 5 minutes (to allow time for market orders to accumulate so that the best exchange rate possible is achieved) and has very low fees. This system is called KlickEx. It only deals in cleared funds, so all users (or banks) have an account at KlickEx, which can be excessed from a computer or mobile phone for deposits and withdrawals.

At this moment it deals in Pounds Sterling, Australian Dollars, New Zealand Dollars, Samoan Tala and Tongan Pa’anga. Currencies coming soon are the Euro, US Dollar, Hong Kong Dollar and Japanese Yen. Let me introduce you to the CEO of KlickEx, Robert Bell.

Whoohaa, this is huge! Endorsements from central banks, the European Union and the United Nations. Instant payments in your favorite fiat currency shortly available in Europe, the United States and Asia. But wait, it gets better..

In November 2013 Mr Bell gave a presentation on the latest developments at his company. The birth of a new global asset-backed currency.

Did he really say IMF, SWIFT, SDR and asset-backed?

From the Finovate website:

After extensive testing in the Pacific, KlickEx is pleased to announce the development of a new asset-backed and algorithmic crypto-currency for institutional and retail use. A stable, international risk-free asset is a key foundation for efficient financial markets, and KlickEx’s award winning interbank payment network has an exemplary track record in stability, and efficiency. Having eradicated the significant systematic deficiencies of Bitcoin, then bridged the portfolio limitations of the IMF’s SDR, the new base asset is a proactive response to recent negative public sentiment towards banking in general, and recent global events including The GFC, Euro-Crisis, BASEL II, III, and fiscal & political instability in Prime currencies.

KlickEx believes in efficient, effective, and accessible financial markets. Our products enhance transparency, stability, inclusion, and systematic velocity by eliminating counter-party risks from central bank balance sheets, informal remittance networks, and mitigating cash inefficiencies for commercial banks, mobile operators and regulators. KlickEx has taken the best, and made it better.

Key Investors: SWIFT, EU, AusAID, United Nations Capital Development Program (UNCDP/PFIP), HM NZ Treasury, Private Investors, Friends and Family & Management

I’ve had email contact will Mr Bell in which he wrote me extensively about his view on economic theory and how his company is developing new solutions for the problems we face. Because they’re still in a developing phase I’m not comfortable writing about the details of their new project (at this moment I have more questions than answers), but if there is more clarity I wil most certainly publish additional information. Mr Bell also told me it will be a slow process as he requires central bank approval in each currency before he is allowed to offer his basic platforms, from which he builds the interesting stuff. This won’t happen over night.