February 8, 2024
An overlooked aspect of geopolitics is the defensive action taken by Asian hegemons and their close allies against a collapse of the Western currency system.
Unlike our economists who are overwhelmingly Keynesian, the economic tradition from Soviet and communist China was that the West's capitalist system would collapse. Admittedly, China's economists have increasingly studied in the West and picked up Keynesian concepts, but they remain acutely aware of the weaknesses of our capitalist system.
This is why they have secretly accumulated gold as the ultimate protection against a collapse of the fiat dollar and allied currencies. The only reason preventing China from putting her renminbi onto a gold standard immediately is that it would trigger a collapse in Western currencies, with consequences for her export industries. She will only take this action defensively. Russia would probably prefer a more immediate move to back the rouble with gold but is constrained in her partnership with China.
This article assesses the hidden gold reserves of China and Russia and their potential deployment.
China has been accumulating gold ever since the Peoples Bank was appointed to manage the nation's gold and silver accumulation in 1983. Bearing in mind that gold was in a massive bear market until 2002, large quantities of bullion became available at low prices. The Chinese state had accumulated sufficient gold for itself through importation of bullion, importing doré for refining, and investment in gold mining to permit its citizens to begin buying in late-2001. By then, I estimate that China had secretly built up holdings of about 20,000 tonnes, and the state has continued to add to its holdings ever since. The Shanghai Gold Exchange was set up in 2002, and to date 23,000 tonnes have been withdrawn from its vaults into public ownership. To this day, China follows a strict policy of not allowing any gold which has entered the country to be exported. And between the Chinese state and its general public, accumulated gold is likely to be in excess of 50,000 tonnes.
Whether China will declare all her gold as monetary reserves is a question for the future. However, Russia entered into a policy of gold accumulation much later. But so far, between official reserves and the State Fund of Russia (the Gosfund) it is believed Russia has some 12,000 tonnes at its disposal, exceeding America's official reserves of 8,134 tonnes. Furthermore, Russia is planning to increase mine output from over 300 tonnes to 500 tonnes annually, and the Gosfund is still buying from domestic sources. i
The contrast with the western alliance's fiat currencies couldn't be greater. The consequences are clear: other nations in the SCO and BRICS grouping are now selling dollars for gold, which is why central banks are estimated by the World Gold Council to have accumulated over 1,100 tonnes in 2022 and a similar quantity in 2023. That accumulation is likely to accelerate as the price of gold measured in western fiat rises (i.e., the dollar and other fiat currencies decline) in a global bullion market already lacking liquidity.
The consequences for US Government funding are dire. For decades, the US Government has relied on foreigners accumulating dollars and reinvesting them in US Treasury stock. The liquidation of these holdings for gold, at a time when budget deficits are rising steeply, is likely to propel dollar bond yields sharply higher.
We are already seeing dollar holdings and financial assets in foreign hands beginning to decline, which according to the US Treasury's TIC figures have fallen from a peak of $34 trillion to about $32 trillion currently. Admittedly most of this decline has been due to valuation effects, reflecting the rise in interest rates and bond yields over the last year.
At the St Petersburg International Forum in June 2022 attended by 81 official delegations, President Putin made it clear that dollars and euro reserves should be sold for fear of confiscation and due to their losing purchasing power. Not only has Putin primed foreign governments to dump their dollar and euro reserves, but NATO's aggression over Ukraine and now the Middle East is bound to continue driving up commodity and energy values in fiat currencies, and therefore the natural level of interest rates and bond yields. In short, by his response to NATO aggression, Putin has the power to destroy the alliance's currency and financial systems. And given that Russia, China, and the entire SCO membership would ultimately benefit from a gold standard, there is every reason for Putin to take the nuclear option, not of the warhead variety, but the financial. WW3 will centre on this issue.
This is the reality behind not just the accumulation of bullion in the Asian axis, but its promotion for trade settlement in the growing BRICS community.
Reprinted with the author's permission.