Time for a new gold standard for Asia

Jul 6, 2017·Alasdair Macleod

Over half the world’s population, living in the Eurasian land mass, understands that gold is money. The leaders of the Asian nations also know that this is true as well. The leaders of the security and economic alliance of the Shanghai Cooperation Organisation, which now incorporates most of these peoples, also know that to become independent of Western hegemony and to forge their own way, they must abandon Western financial systems and markets, replacing them with a new monetary order, serving their own needs. This is demonstrated in the establishment of parallel multinational financial institutions, duplicating and replacing dollar-centric development banks and settlement organisations.

The direction of travel for the SCO is to eliminate the use of the dollar for cross-border settlements between SCO member states: that much has been made clear. The replacement monetary arrangement must avoid the fundamental weaknesses of the dollar as a fiat currency, partly because these weaknesses will be exposed as the emergence of the SCO undermines the dollar, and partly because the principal drivers of SCO economic policy, China and Russia, have shown through their actions that they have a different vision of their destiny from imperial America.

This article considers the issues involved, the geopolitical sensitivities, and proposes how sound money might emerge to replace the existing fiat-money regimes.

The ascendency of the Shanghai Cooperation Organisation (SCO)

It seems remarkable the Western mainstream media has been so absorbed with China and Russia’s leaders as hate figures, that they have ignored their greatest achievement: the unification of Asia under the aegis of the SCO, driven by the vision and partnership of China and Russia. Including the new memberships of India and Pakistan, the combined population of SCO member states is estimated at just over 3,000 million, out of a world population of 7,000 million. Dialogue partners and observer states, who expect to join in time, add 280 million, and the Far Eastern nations with strong economic ties and Chinese diasporas add a further 800 million. Furthermore, Japan and South Korea are bound to be drawn towards the SCO and out of the American sphere of influence.

This is the summation of a bloc that, except for Russia and Belarus, has a non-Christian, multicultural ethic, and which selects only those elements of western civilisation that suits.

It is therefore fundamentally different from America’s top-down imperial culture. Furthermore, all these nations differ from the welfare nations of the West by having low-cost governments, and therefore low tax burdens on their productive populations. The ability of SCO members and associates to foster the improvement of their standards of living is far greater than that of the nations of Western Europe and North America, which are hampered by high-spending governments with welfare costs spinning out of control.

It is low tax versus high tax. While low taxes will permit the populations of the SCO member states to rapidly accumulate wealth and improve their standards of living, those of the West are being impoverished by their governments. Western governments are eating their tax base. SCO memberships have high savings rates. And as the very poor are lifted out of poverty, they will become savings-driven as well. We know this because the Asian tradition is for families to stick together, save and provide for their elderly, the sick, and the family’s future prosperity.

Admittedly, the SCO is a work in progress, but its expansion only a month ago by including India and Pakistan, bitter enemies over Kashmir and with stark religious differences, is the first enlargement in more than a decade. However, the dangers that tension between these two states will escalate must be admitted, because Prime Minister Modi appears to be promoting Hindu fanaticism. We must trust that the Indian government, which at least has had the vision to join the SCO, will not lose sight of the bigger picture, and that is trade will eventually give India economic and political power. The Pakistani government has a history of following the money, and doubtless Chinese investment in the port of Gwadar and in the North East, linking the overland Spice Road with the maritime version, is focusing the minds of ministers and businessmen in Islamabad.

Following India and Pakistan, Iran and Turkey are slated to join the SCO, possibly within a year. Again, these countries have populations that save, and given their currencies have a history of losing their purchasing power at an alarming rate, the monetary emphasis is firmly on gold. Therefore, the three billion people in the SCO plus those due to join have a common form of money which binds them, acceptable throughout Asia, and that surely will determine the evolution of government currencies.

China is changing

It is a plain fact that if you are going to have a savings-driven economy, which certainly describes China and most of the SCO’s current and future membership, it will only prosper with sound money, that is money that either holds or increases its purchasing power over time. There may be a temptation to rob those savings by expanding the quantity of money, and indeed, China has financed economic expansion by expanding bank credit since the great financial crisis. The reality is she had little choice. Her reliance on foreign trade with crippled Western nations meant that a sound money policy would have led to the unemployment of tens of millions, and the threat of riot between the various ethnic groups.

That is now changing rapidly and radically under President Xi. China’s economy has passed through the initial wealth-building phase and is embarking on the next. The focus is now on the internal economy, with improvements in infrastructure, technology and quality of goods. But that’s not enough, so the current (thirteenth) five-year plan and the ones that follow are set to spread China’s remarkable economic formula throughout Asia. Export markets will still be developed, but the emphasis is shifting towards quality and technology, with Europe rather than America becoming the principal foreign market.

The redevelopment of the old trans-Asian trade route under the acronym OBOR (one belt one road) is central to this expansion. Not only is it a civilising route, bringing rapid industrialisation to Middle Asia, but it means Chinese production will get to European markets by rail in about ten days (goods are currently taking about fifteen days – but that time is expected to reduce significantly). Furthermore, European containerised quality goods and machinery can be shipped the other way with considerable cost savings. In 2016 1,702 freight trains made this 7,500 mile journey, more than double the figure for 2015.

The Maritime Silk Road connects the nations of the South China Sea, the South Pacific and the Indian Ocean. Ports such as Gwadar in Pakistan, and Zanzibar and Mombasa in East Africa are being expanded. A new standard-gauge railway from Mombasa to Nairobi and Kampala to replace the old Colonial metre-gauge is agreed with the Kenya and Uganda governments. This will allow the shipment of materials from the heart of Africa to feed the development of Asia. China is also a major investor in Zambia’s copper production.

There are links being developed between the land and sea OBORs, between China-Pakistan, and China-Bangladesh-India-Myanmar. China, through the SCO, is driving change and modernisation throughout Asia. It’s in line with Halford Mackinder’s Heartland Theory. In both 1904 and 1919, Mackinder identified the central-northern Asian landmass as the world’s pivot region, from which a well-armed and organised great power could bid for global hegemony. He thought this might happen if Germany allied with Russia, or China with Japan. This could also have been achieved if the Allies lost the Second World War. Time has moved on, and China and Russia have become the partnership forming the heartland.

The relevance of Mackinder’s Heartland Theory is that it accords with the vision of Presidents Putin and Xi. It also informed the Americans, with giants of geopolitics such as Kissinger and Brzezinski said to have been influenced by Mackinder. We can therefore assume that America’s deep state sees the Sino-Russian alliance as the principal danger to her global hegemony for this reason. This is where the geopolitical battle-lines are now drawn.

In modern times, there have been three theatres of war between America and the dominant powers of Asia: military, economic and financial. While there is, or has been, some sabre-rattling with proxy wars in the Middle East, Eastern Europe and Caucasus, these have been trivial to the big picture. The West, though its public doesn’t yet realise it, has also lost the economic war. That leaves the financial. This is the battleground now chosen by China and Russia, in the knowledge that America is in relative decline. The strategists in Beijing and Moscow have their own interpretation of how America uses the dollar to control the world, and want to distance themselves from this control. To do so, the strategy so far has been to tread carefully, letting America make all the mistakes.

Geopolitical update and round-up

The mistakes have been many, and suddenly, we find the world is backing away from American domination. America and her NATO partners have failed in their proxy wars in Ukraine and Georgia. Syria is not working out as the Americans intended, and the Gulf is becoming destabilised, partly through America’s loss of power over Saudi Arabia. The fight between President Trump and America’s intelligence agencies for control of foreign policy is a civil war at the heart of America’s government, undermining US effectiveness abroad and destabilising her allies.

The turf war between Washington and Langley, and the fact that Trump is unschooled in diplomacy, are new wild-cards. The EU has had a rude awakening, with Trump wanting them to stump up serious money for NATO. Germany faces American trade barriers being set up against her motor industry. The days following WW2, when America devised the original plan for a united Europe, and established NATO to keep the Russians, Germany suppressed, and American troops on the ground, finally ended with Trump’s presidency.

The geopolitical ramifications are immense. Germany, now the undisputed leader of the EU after Brexit, is no longer subjugated by Anglo-American deference, and is advancing plans for her own defence forces under the cloak of the EU. The removal of America’s hand-maiden, through Brexit, could hardly be timelier for Germany. In 2016, the geopolitical ball certainly rolled Germany’s way, and she shows every intention of grabbing it. We can expect to see Germany lead the EU into closer economic ties with Russia, in defiance of American sanctions.

Britain’s foreign policy is still very much in Langley’s pocket, with the Foreign Secretary, Boris Johnson, parroting the MI6/CIA line on virtually everything. A more statesmanlike approach will be needed to appreciate where the vested (commercial) interests lie with respect to Russia. However, London is already well advanced in providing financial facilities to China. In conjunction with Hong Kong, the British are helping China to develop an American-free financial market for the yuan. Indeed, only last Monday, China announced the liberation of its domestic bond market for foreign investors, indicating that from China’s point of view, capital liberation is progressing according to plan.

Turkey, a member of NATO, has become a key ally for Russia on her south-western flank, along with Syria. One suspects that Putin tipped off Erdogan prior to last year’s attempted coup d’état, which was probably instigated by the CIA. The coup failed, Turkey is no longer a functioning member of NATO, and instead has moved firmly towards Russia. Turkey long ago gave up all hope of joining the EU, and is instead aligning herself with the SCO. She is also the gold trading centre feeding into the Moslem states of Central Asia.

Being predominantly Sunni, Turkey is at odds with the deeply Shia state of Iran, but the trade links between the two persist. Driven by the common relationship with Russia, Turkey is likely in time to downplay the religious differences with Iran and move closer to her in their joint challenge to Saudi Arabia for regional power.

In Saudi Arabia, there is a new element of destabilisation, the young and impulsive Prince Mohammed bin Salman having seized power from America’s preferred appointee, Mohammed bin Nayef. Nayef is rumoured to be under house arrest, and America’s influence with it. Salman’s first act was to impose sanctions on Qatar and make demands that are impossible to meet and commonly understood to be unreasonable. In doing so, Salman has put himself in a position from which he cannot back down. His action is either a deliberate prelude to an invasion of Qatar, or a reflection of his inexperience.

The deadline for Qatar’s response was originally Monday this week, but has been extended to Wednesday, and at the time of writing (Thursday morning) is unresolved. Principal among these demands is to scale down diplomatic ties with Iran and expel Iran’s diplomats. Iran in turn has vowed to stand by Qatar, and if necessary defend it. Therefore, Saudi’s action becomes a confrontation with Iran, against which she is already engaged in a proxy war over Yemen.

If Qatar escalates out of control, Iran can easily cripple Saudi’s oil fields in the Gulf, driving up oil prices. That may be in the interests of the Russian-Iran partnership, so could become an factor in determining Iran’s action.

Saudi has also demanded that Turkey’s army base in Qatar be closed, potentially bringing Turkey into conflict with Saudi Arabia, further cementing her relationship with Iran and Russia. These appear to be the likely consequences of Prince Salman’s ill-thought out action.

In the Far East, both Japan and South Korea have substantial investments in China, with significant elements of their manufacturing capacity located there. The Chinese diaspora throughout the region has strengthening economic and ethnic ties with China. Australia’s most important export market is China, and China virtually controls sub-Saharan Africa. That leaves parts of the Middle East and the Americas under American control. But even states like Chile are major exporters to China, as is Canada.

Whichever way one looks at it, China now dominates the world economy and has displaced America. The economic war has been lost by America. However, America still controls the money, and while China has made some progress in getting the yuan accepted for trade, it has been too slow, given other events. So far, China has merely stood back and let markets determine the rate of drift from the US. Having established the Asian Infrastructure Investment Bank to attract western capital into infrastructure programmes in the SCO countries, and the New Development Bank (the BRICS Bank), to mobilise capital for infrastructure development in developing countries everywhere, China has set up alternatives to the post-Breton Woods establishment.

Now it is down to the money.

Defining monetary requirements

Before the election of President Trump, China and Russia seem to have been prepared to take an evolutionary approach to monetary developments. Their non-Keynesian (predominantly Marxist) economists thirty years ago advising Beijing and Moscow had been taught that Western capitalism would destroy itself. Their reasoning may have been misguided, but events appear to have confirmed the diagnosis. Economic strategy was never to fully embrace Western capitalism, but to select the free trade benefits, to keep control of the outcome, and avoid the fate of the West. Economic policy has evolved since then, but the fundamental mercantilist approach of strict top-down management has not shifted an inch.

The strategy of letting the American enemy destroy itself financially may not have come to an end with Trump’s election, but developments have unquestionably accelerated. Established global relationships are up in the air, as described in the geopolitical roundup above. While China and Russia will not want to be seen to deliberately disrupt the world’s monetary order, they are prepared to act, and Trump’s election will have almost certainly advanced their plans.

Bringing forward a new, non-dollar monetary regime for the future SCO-controlled world order requires careful consideration. Hints have been dropped throughout this article about the propensity to save throughout Asia, contrasting with the propensity to spend in the Western welfare-states. For a long-lasting monetary solution, this tells us that the conditions that led to Britain’s remarkable economic progress of the nineteenth century are closer to a monetary template for the SCO’s future than forcing a depreciating dollar-clone on the Asian population, and on the SCO’s trading partners.

A savings-driven economy, as Britain demonstrated two centuries ago, and as both Germany and Japan also demonstrated in the last century, is the path to economic progress and political power. This means sound money, money backed by gold, and limits put on the expansion of bank credit. We have no way of knowing for certain that the leaderships of Russia and China share this view, but there are strong indications they might.

The appointment of Elvira Nubiullina to the governorship of the Central Bank of Russia appears to confirm a sound-money thesis for Russia. She was Putin’s personal economic advisor prior to her appointment in 2013, and has successfully reformed the Russian banking system. She did not panic when the rouble collapsed in the foreign exchanges in 2014, due to circumstances beyond Russia’s control. Russia aggressively added to her official gold reserves, when her Western counterparts would have preserved the dollar content instead.

China has had a long-standing policy of accumulating gold, the original regulations appointing the People’s Bank for this function dating from 1983. The Shanghai Gold Exchange was set up under the control of the People’s Bank, after the ban on public ownership of gold was lifted in 2002. Since then, advertising campaigns have been run by the Chinese government to encourage citizens to buy gold. And to date, the SGE has delivered nearly 15,000 tonnes into public hands (14,000 of which were from 2008 onwards). Admittedly, this is net of scrap.

There can be no other explanation than the state had acquired sufficient gold by 2002 to permit the public to buy. The logic of the state accumulating bullion (mostly still not declared) and encouraging the public to do the same points to the eventual inclusion of gold as a stabiliser for the yuan. Furthermore, China has prioritised gold mining, and refining is a closely-guarded state monopoly, taking in not only China’s production, but also doré from Mongolia and elsewhere. In short, since the great financial crisis, China has come to dominate the physical gold market.

Both China and Russia, the leading SCO partners, are now positioned to move their currencies onto a sound-money footing. Laying to one side the disruption this might cause in Western capital markets for a moment, powerful motives lie for China to reduce the yuan costs of imported raw materials and goods, and for Russia to render the rouble immune from Western attack. The interests of Russia and China differ, but have a common objective.

A sound yuan, at least relative to the dollar, will reduce the costs of imported raw materials for China. When industrial commodities are priced in depreciating dollars, China has a direct interest in a rising yuan/dollar rate. Furthermore, her export markets to America are now secondary to her Asian markets, and are becoming less relevant. Trump’s determination to impose trade barriers has hastened the need for China’s trade focus to evolve as well. This change is underway, with Beijing implementing far-reaching plans to reduce economic dependency on exports of cut-price goods. She has a looming shortage of labour, and plans to redeploy her existing resources towards a technology-driven domestic economy, as well as for the industrialisation of her Asian back yard.

While China might have preferred to evolve more gradually towards her economic objectives, the election of Trump increases the need for China to speed up her plans, including putting the yuan on a sound footing.

On the surface, Russia’s requirements are different and appear to militate against a strong rouble. Russia is dependent on oil exports, and has significant exports of other commodities as well. The reason that she survived the oil crash in 2014, it would be argued by Western analysts, is her extraction costs were in roubles. They will say the fall in the currency and Western sanctions (which helped preserve the trade balance) allowed Russia and Putin to survive. This assessment is overly simplistic.

If the Russians understand the importance of sound money, and it is admittedly an if, the recent oil debacle and sanctions will be understood to be a side-show. More importantly, there is the strategic benefit of consolidating Russia’s dominant position in the oil market with Iran to undermine the dollar’s status. Just as America appeared to encourage a collapse in energy prices in her financial war against Russia, Russia might be prepared to retaliate in similar fashion to undermine the dollar. This time, oil will be the weapon against the dollar, as opposed to the dollar being the weapon against oil.

What China and Russia need is a currency plan to wrest global monetary power away from the dollar, and to ensure their currencies maximise the wealth-creating benefits of saving for their citizens. That way, the SCO will be insulated from further attacks in the currency war. It will also be game-over for the American dollar.

Establishing a new gold standard

Returning to a gold standard will be alien to Western observers, who will see it as a backward step, in denial of modern monetarism. However, it is in markets that the relationship between different forms of money are made, and for the large majority of Asia’s population, gold is superior money to government currencies. For them, prices are more naturally related to gold than unbacked fiat. Linking a fiat currency to gold is relatively simple. Less easy to stick to perhaps are the disciplines that come with it. Given the massive expansion of bank credit overseen by the People’s Bank of China in recent years, a movement towards sound money might appear unlikely, or even impossible.

However, the expansion of digital money must be curtailed, with new central bank money backed by gold at a fixed rate in a currency board arrangement. The expansion of bank credit, if permitted, must be heavily restricted, and there must be no bank rescues. Privately-owned banks must trade on a reputation for soundness, and the banking public made fully aware that they are responsible as individuals for their own assessment of banking risk. Additionally, the government cannot run persistent deficits.

This is how it might be done. First, the People’s Bank announces the currency scheme, revealing enough gold held in various government accounts to be transferred to the reserves to back it. This quantity is likely to be substantial, given that the People’s Bank has been accumulating bullion since 1983 at far lower than contemporary prices, only it hasn’t been allocated to monetary reserves. This could easily cover half the yuan quantity issued by the People’s bank, amounting to the equivalent of 13,000 tonnes at current gold prices, which is almost certainly available.i

The yuan would be readily convertible into gold at a fixed rate to be set, perhaps in multiples of a million yuan for administrative convenience.

Secondly, China announces the issue of an irredeemable bond to be priced at a discount, with a coupon of 2.5%, to give a running yield of perhaps 4%, payable in yuan which is convertible at the fixed gold rate. This is about ½% less than the current yuan interest rate, and its issue will take place after the gold/yuan rate has been fixed. The reason for issuing the bond at such a discount is twofold: to impart a strongly positive yield to this gold proxy, thereby discouraging speculative redemptions for gold, and to deliberately transfer wealth to ordinary savers as the running yield falls, which would be the likely outcome.

Third, the conversion rate between the yuan and gold should be fixed irrevocably at some time in the future, perhaps after six months, once the bullion market has settled down, and some stability has returned to the gold price. The bond would be made available only to Chinese domestic savers initially, with plans for further issues to extend it to all holders of yuan in due course.

The need for the international gold market to adjust to such an announcement should be obvious. There are systemically significant short positions in the futures and forward markets, as well as unallocated gold accounts, which would be at risk of being called. There will almost certainly be international businesses who will want to hedge their dollar positions in favour of the gold-backed yuan. Asian central banks will also want to increase their gold reserves, something India has been desperately trying to do by gaining possession of her citizens’ gold.

The irredeemable bond will never need to be repaid, the investment attraction being both the running yield for this gold substitute, and the potential for capital appreciation as the yield drifts lower. On the supply side, demand for bullion from Chinese citizens is likely to diminish as savings are diverted into the new irredeemable bond. If the currency is as good as gold, there is no need to own monetary gold. The supply released will to an extent be determined by the running yield on the bond.

Therefore, it makes sense for the rate to be fixed after the market has adjusted to the arrangement. The proceeds of the irredeemable bond would be used partly to bail out China’s regional governments, giving control over them to Beijing. This is fully in accordance with existing centralising policy. It would also be used as a source of turn-key financing of non-recurring expenditure for developing infrastructure, both in China and throughout Asia.

China would be the first to adopt the gold standard, to be followed by Russia. Russia could adopt the same methods outlined above, with the additional benefit of a halving of interest rates. The issuance of jumbo Chinese and Russian irredeemable bonds for domestic recycling of savings would also have the benefit of generating wealth for savers, the importance of which should not be underestimated. By limiting it, at least initially, to Chinese and Russian nationals, disruption of Western financial markets would be minimised.

One can envisage western analysts and traders in the bullion banks focusing on the reduction in demand for physical gold from Chinese nationals as a bearish development. This would, perhaps, help deflect blame for the longer-run negative effects on the West’s fiat currencies, which have been horribly over-issued in recent years.

Western analysts, most of which subscribe to the gold-is-a-pet-rock theory, will be completely wrong-footed by these moves. It may take months for the implications to sink in, and by keeping the sound money scheme available only to domestic savers initially, it would not be seen for what it is: a dagger aimed at the heart of the dollar. The Fed and the US Treasury have been pushing pet rock theories since 1971, when Nixon “temporarily” abandoned the post-war dollar-gold standard. If they were to start arguing that such a move was disruptive of the international currency regime, they would at last be admitting gold is money after all.

The Bank for International Settlements’ monetary policy could then turn against America’s anti-gold stance, given the reality of the situation. If, as seems likely, the outcome is to undermine the dollar’s purchasing power, the focus will be less on suppressing demand for gold and more on seeking a solution for the dollar, and the other fiat currencies sinking in its wake. The loss of support from the BIS would certainly be demoralising for the Fed.

Importantly, it would be the beginning of the end of the current gold futures market. A bullion bank would be foolish to suppress the price of gold against China, with a yield of 4% on a major gold substitute. The Chinese state banks, active in international markets, would welcome the arbitrage opportunities. Over a six-month period, before the yuan-gold exchange price was fixed, gold would probably stabilise at less than $2,000 per ounce, because the move would not be accompanied by an immediate deterioration in the dollar’s purchasing power over other goods.

China and Russia would then be able to extend ownership of their irredeemable bonds to foreign institutions in due course, which coupled with China’s insatiable demand for dollar-priced commodities would be the death-knell for the unbacked dollar.


In summary, the war between America and the two powers in control of Mackinder’s Heartland is due to move into its final phase, a battle between currencies. The pace has been accelerated by the election of President Trump. It is now becoming more important for China and Russia to confront this issue and take the initiative. The time when they could just rely on America to make the strategic mistakes is probably over, and more positive action is required.

The most effective way for them to win this currency war is to expose the inherent weaknesses of the dollar by resorting to a sound money arrangement, backed by gold. The objective is for China and Russia to banish all foreign control of money in their trade arrangements and spheres of economic influence, and to create ubiquity in money within the enlarged SCO.

This appears to have been in accordance with the long-term planning of China, which has accumulated a substantial undeclared stash of bullion since 1983, likely in excess of 20,000 tonnes, and encouraged her private citizens to accumulate up to 15,000 tonnes since 2002. Russia has also been accumulating gold aggressively.

China and Russia must make the yuan and rouble sound without being blamed for the consequential collapse of the dollar, and the other welfare-nation currencies. This can be achieved by limiting access to gold-backed yuan and roubles to residents of their own countries initially, before making them available more widely. It will make it less easy for the Americans to blame the demise of the fiat dollar on the domestic actions of the Chinese and Russian governments.

The almost certain outcome of the currency war, if China and Russia pursue the sound-money route will be to secure the trade dominance of the Shanghai Cooperation Organisation, and the isolation of America as a power. The era of state money unbacked by gold, which has ended up impoverishing everyone other than lending bankers and their favoured customers, will finally come to an end.

iAn examination of capital flows since 1983, when the People’s Bank was tasked with managing China’s gold acquisition programme, shows a secret accumulation of between 20,000 and 30,000 tonnes gold is possible. If this is the case, China has more than enough gold reserves to back its currency. See: https://www.goldmoney.com/research/goldmoney-insights/china-s-gold-strategy. We can also reasonably assume that Russia’s declared reserves are not the full story as well.

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