Asian gold strategy clarifyingJun 6, 2014·Alasdair Macleod
The Russians came up with an extraordinary statement recently, central to why Russia and China are buying gold, the importance of which was missed by the media. President Putin said that "Russia and China need to secure their gold and foreign reserves." He may have been overstepping the mark in making comments about China's monetary policy, but he was unlikely to have done so without good reason. Furthermore it is impossible to secure foreign currency reserves, because they are at all times under the control of the issuing central banks. So what Putin was actually implying was that China and Russia need to secure their gold.
For those of us that follow these issues closely the emphasis on gold comes as no surprise. The reason this particular penny has not dropped in western markets is we do not think like they do. They emerged from failed communism based on Marxian creed. Keynesian and monetarist theories developed while most of Asia was in economic isolation, and is based less on Marx and more on Christianity. This means the Russians and Chinese have not automatically adopted western economic theory in the wake of communism's collapse: parts of it, yes, wholesale no.
For this reason it is far too simplistic for western commentators to analyse Russia and China in western terms. Both nations from the top down, in common with the whole Asian population, have no illusions about national currencies which always devalue over time, compared with gold which for them will always be the most secure store of value. And unlike western governments the Chinese and Russian governments regard themselves as being business-like in their affairs and so care very much about the quality of payment they receive for their nations' exports.
This is why it is likely gold will play a major role in cross-border trade in Asia. It is also worth noting that the Chairman of the State Bank of Russia is Putin's personal appointee, a woman who previously had been his own economic adviser. She would not have got this position by parroting anti-gold Keynesian and monetarist theory. All the indications are that Elvira Nabiullina is at one with Putin and that she, like him, is a commercial and economic realist. She is also one of very few central bankers who refuses to rescue insolvent banks.
The State Bank of Russia under her chairmanship is also accumulating gold, allocating what a western central bank would regard as precious foreign reserves that should be used to protect the currency in troubled times. So Russia's view on gold is in line with China's, giving force and validity to Putin's statement.
China's long-term plans
I have long argued that the Chinese government is working to a strategic plan, which is only partly disclosed through formal five and ten year targets. Having developed her economy on the back of rapid industrialisation China is now switching her attention to her own back yard, which ironically could be described as the maximum boundaries of Genghis Khan's empire in the thirteenth century, from the Bering Strait to the gates of Jerusalem. She will continue to trade with Europe and America and to extract minerals from Africa and Australia, but there is no doubt her commercial focus is now on Asia. And when it comes to cross-border trade settlement negotiated at inter-governmental level, we can assume western currencies will be excluded where possible. The choice will be for the balance of trade to be settled in a mutually acceptable Asian currency or gold.
China and Russia have been planning towards this outcome for a considerable time through the establishment of the Shanghai Cooperation Organisation, and this is the backdrop to mutual trade settlement policies. Between its members, associates and future members the SCO covers almost all Asia, with the exception of the Sinophile nations of South-East Asia and the Arab states. These regional and cultural blocs are bound to be subsumed into the SCO as the west's economic and political power declines. It is a total market of over four billion people, four times that of a declining west.
Genghis Khan's old stamping ground is being moulded into an economic bloc that will become larger than the North American Free Trade Agreement and the EU together, and potentially more cohesive. It does not have the heavy baggage of the welfare state and its citizens are savers. The confidence China feels in this strategy is reflected in territorial disputes with her non-SCO neighbours. The sub-text is she is telling Vietnam, the Philippines and Indonesia to ditch the foreign influence of America and join the SCO.
Already governments all over Asia are beginning to recognise this pull towards a combined future. As soon as we leave Afghanistan she is likely to be fast-tracked into the SCO. Turkey is turning her back on joining the EU and is moving towards SCO membership. And coincidentally financial markets from Moscow to Dubai and perhaps even Bangkok are all gearing up to be gold-dealing centres.
The signs are as clear as daylight. With a financial system that has the structural stability of a house of cards and the prospect of eventual bankruptcy from welfare commitments, trade with the US and EU is not the future priority for China and Russia. And without the west's Keynesian and monetary baggage to carry, they have retained in large measure an understanding of the importance of gold as sound money.
This is why so much of the world's gold has ended up in Asia, including the Middle East. Gold is destined to be an integral part of Asia's financial system, leaving the west short and out in the cold. And we know from the tonnage flowing to Asia that much of this gold has come from western central bank vaults.
It amounts to an Asian gold strategy that excludes the west, and by supressing the gold price through sales and leasing of monetary gold western central banks have unwittingly enabled China's carefully thought-out plans. How and when will western central banks break the news to us all, that the bulk of the gold reserves entrusted to them are now in Asian hands, and they have been secretly complicit since the 1970s in setting up a whole continent with what probably amounts to the largest wealth transfer in history?