The SCO, China, Iran, and gold

2012-OCT-07

I make no apology for returning to the subject of China, its role in the Shanghai Cooperation Organisation, and gold. Gold is now a strategic metal for present and future SCO governments, which between them have over 40% of the world’s population; and now that the price of gold is re-establishing its rising trend, understanding its future role as a replacement for the US dollar is increasingly urgent, because gold is wealth and this wealth is being transferred from west to east.

The SCO is an economic bloc consisting of China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan. Between them they produce about 26% of the world’s gold, none of which leaves the SCO. Other nations accepted as future members are India, Iran, Pakistan, Mongolia and as soon as NATO leaves, Afghanistan. Belarus and Sri Lanka are on the waiting list. It is no less than the economic unification of most of Asia, with a combined population of three billion. All their central banks are buying gold, and the gold imported by the citizens of just two of them (India and China) accounts for all but 400-500 tonnes of the rest of the world’s mine production – and some of that (particularly in Africa) is now also controlled by China.

One of the SCO’s economic objectives is to do away with the dollar for cross-border trade between members. Any doubts we may have on the matter have now been dispelled as a result of the US Government’s monetary sanctions on Iran.

Iran is important, because it supplies crude oil to China and India, and the Americans have banned all countries from buying Iranian oil on pain of sanctions. The consequence has been to force Iran to settle some of her trade in gold, giving SCO members both a de facto remonetisation of gold, and a solid reason to want higher prices for it in US dollar terms, so that it buys more.

This creates a dilemma for the US. If she escalates her attacks on Iran, she threatens the interests of China, India and other SCO members. At this stage it is too early to judge the political reactions of the SCO members to this threat, but there are broadly two possibilities: either military or economic.

It is too early for China to fight a currency war. She is developing her internal market, and in time the SCO will provide her with the most powerful captive market since the British Empire. However, she still depends on declining markets in the West for much of her economic activity. However, the reason she has accumulated gold and encourages her citizens to do so as well is ultimately to transfer wealth from the West.

The Iranian situation is already undermining the position of the dollar as the international currency in the context of pan-Asian settlements, because oil is simply more important. Attempts over the years by western central banks to bluff us out of gold ownership have given China and its SCO affiliates a tremendous wealth-transfer windfall, as we may be about to discover. That’s what the geo-politics of gold is actually about, and it is a pity our leaders seem to be blind and deaf to it.