London Calling revisits Goldilocks - without the bearsPublished by MAC on 2009-11-02
China is going gold crazy, but why?
Last July, London Calling (paying due deference to "Money Morning") hazarded a guess that the Mighty Dollar was set for an almighty - indeed terminal - fall, as the currency underpinning global trades.
Over the past few weeks several pundits have echoed this view, including the World Bank.
What then would replace the greenback - IMF Special Drawing Rights, the yuan, oil, gold - or even a basket of commodities?
Speculation that the yellow stuff is ripe for such a role grew shortly after global investment banks began falling like ninepins in 2007-2008.
Now, the world's biggest commodities exchange, located in Chicago, has launched gold in the form of a "trading collateral". As Pro-Active Investors website put it a fortnight ago:
"Using gold bullion as a collateral reserve provides traders with another alternative to the US Dollar and US Debt Securities, which predominantly feature as trading collateral.
Several reports have highlighted that the outcome is more Dollar negative rather than gold positive, as it would represent leveraging of existing gold holdings."
It's worth re-iterating what this column said three and a half months ago, when conjecturing that a "new global capital" may now be rising up from US fiscal ashes.
We were playing on a pun that not only denotes an alternative "standard" to dollar-denominated trades, but posits Beijing where Wall Street and the US Treasury currently reside:
"... Forbes magazine will tell us next weekend that: 'Beijing is threatening to halt its Treasury buying if the dollar slides and has suggested that IMF Special Drawing Rights (SDRs) replace the greenback as the world's premier reserve currency.'"
However, we wrote: "This may well be an intermediate, 'softening-up' strategy by the Chinese regime. As Forbes acknowledges, SDRs are 'not a tangible medium of exchange or a claim on one. [They are] simply an accounting metric the IMF uses to balance its books [with] no real commercial application.' Therefore, 'just in case it doesn't happen, China is buying gold'.
We went on to point out that: "China is now the premier gold producer and among the leading sellers of the yellow metal. It continues to be the most important importer of other key metals. The government doesn't require these stockpiles for its own citizens' short, or even medium-term, benefit. And China's game plan now seems seriously focussed on minimising wasteful use of minerals; closing down hazardous and polluting mines and plants; and absolutely reducing its emissions of global greenhouse gases.
And we concluded: "Surely, the most compelling reason for China's hectic buying of these commodities is to bulwark its global economic and geo-political standing?
"The prospect of the world's most populous nation soon becoming, not only its most powerful deployer of capital agency, but also the prime moderator of its currency and commodities-backed trades, may be closer than we think."
Proactive Investor's Jamie Ashcroft suggests that the Chicago Mercantile Exchange group's recent move "...is perhaps another confirmation that gold is indeed money."
He might also have added , as just pointed out, that China is now also the world's biggest buyer, as well as producer and stockpiler, of the yellow metal.
[Source: Jamie Ashcroft, "Now Chicago Mercantile Exchange to accept gold as trading collateral", Proactive Invetors, 20 October 2009]