One of those straws is Russia’s continuing accumulation of gold reserves. Financial pundits tell us that this is to avoid being beholden to the US dollar, and undoubtedly there is truth in it. But why gold? Here, the pundits are silent. There is an answer, and that is Russia understands in principal the virtues of sound money relative to possession of another country’s paper promises. Hence, they sell dollars and buy gold.
But Russia is now going a step further. Izvestia reported the Russian Finance Ministry is considering abolition of VAT on private purchases of gold bullion.[i] We read that this could generate private Russian annual demand of between fifty and a hundred tonnes. More importantly, it paves the way for gold to circulate in Russia as money.
We should put ourselves in Russia’s shoes to find out why this may be important. Russia is the largest exporter of energy, including gas, pushing Saudi Arabia into second place. This means she is also the largest acquirer of fiat currency for energy. That’s fine if you like fiat currencies, but if you suspect them, then you either turn them into physical assets, such as infrastructure and military hardware, or gold. Russia does both.
Then there is China. China has started announcing monthly additions to her gold reserves. China is up to her neck in dollars, and the relatively minor monthly additions to her reserves really make little difference. However, the link between the gold exchanges in Moscow and Shanghai strongly suggest Russia and China are coordinating gold dealing activities.
In any event, China now dominates physical bullion markets. Deliveries (withdrawals) from the Shanghai Gold Exchange’s vaults into public hands are running at roughly two-thirds of the world’s annual mine supply. At 426 tonnes in 2017, China is the largest gold mining nation by far, and the state owns all China’s refining capacity, even taking in doré from abroad. No gold leaves this version of Hotel California.
The frequently-expressed reasoning for their gold policies is Russia and China are locked in a financial war with their largest debtor. This is not the underlying reason these nations have chosen gold as an expression of their dislike of America’s weaponization of her monetary policies. They know the difference between unbacked fiat currencies and sound money, which has been chosen by people ever since they began to use a separate commodity to intermediate in transactions.
However, it is true the Americans have weaponised the dollar, bringing an urgency to China’s and Russia’s deployment of gold. US dollars have been the world’s reserve currency for the last forty-eight years, and America, which pays for everything in costless, newly-issued dollars, now says it wants a better trade deal. It obviously assumes the dollar’s supremacy is unchallengeable and in their need for dollars China and other exporters to America will be forced to comply.
Let’s pick this apart. The US Government pays for everything in a currency which it issues at will. New dollars only gain value once they are in circulation, but the cost of production is zero, stealing their circulatory value from previously existing currency. However, the US Government is unable to balance its books without recycling some of these duff dollars into its own IOUs (Treasury stock). Because they are required to be repatriated to balance the US Treasury’s books, the US Treasury borrows them back from foreigners who might otherwise question the dollars true value. So, foreigners get a Treasury IOU eventually paid out in a currency IOU. It really is pig on pork.
So far, the foreigners have been successfully conned, though questions are beginning to be asked.
Logic suggests that the US Government getting something for nothing is as good as it gets. But President Trump thinks this is unfair, not on the Chinese and other foreigners swapping goods for ultimately worthless paper, but on America herself! He holds out for an even better deal. He demands the Chinese and others stop supplying real stuff to his people in return for his costless, dubious paper. In other words, speaking on behalf of the American People, he is now dissuading the Chinese from giving Americans something for what amounts to nothing.
Those on Planet Asia could be forgiven for looking at things rather differently. After Mao’s death and a brief period of accepting the dollar scam on the basis that demand for dollars would always ensure they could be exchanged for value, the Chinese have for a long time smelled a rat. This is why in 1983 they appointed the Peoples Bank to be in charge of liquidating dollars for gold and silver. They have gently played along with the dollar scam ever since, not wanting to be the party that exposes it for what it is.
Now it is Trump himself who has blown the whistle on the dollar. China and Russia have undoubtedly got the message from this new art of the deal. But at the heart of it is a deep, wider malaise in the fiat currency world. Understand that, and we get to the true reason why Russia and China are wary about accumulating the West’s fiat currencies. Until now, they have run with the hare and hunted with the hounds. China in particular uses fiat renminbi to drive expansion. But then if she didn’t, today’s world order would have probably collapsed in the wake of the Lehman crisis as the flaws and weaknesses of fiat currencies would have been exposed...
- Source, Alasdair Macleod via James Turks Goldmoney