Gold is part of the new economic order
One
thing is certain: gold is not part of the old economic
order, which is comprised of the US, UK, Euroland, and
Japan. The new economic order is different, embodied in
the Shanghai Co-operation Organisation (SCO) with its
members, observer states and affiliate nations. Those
interested in the future course of precious metal and
commodity prices should take the trouble to understand
the significance of the SCO. The SCO is already driving
prices in commodity markets, and this transfer of power
from the old to the new economic order is of tectonic
magnitude, but the pace is far from tectonic, more like
volcanic.
The
driving forces behind the SCO are China and Russia, both
large gold producers. Gold will have a role in the SCO,
but what it is has yet to be disclosed. However, we do
know that the SCO’s other participants are also buyers
of gold. Their actions are either freakish coincidence,
or there is a hidden agenda to include gold in the SCO’s
new financial order. This point was rammed home this
week when Iran announced it had also accumulated gold,
indicating the quantity to be about 340 tonnes.
I
have written about the SCO before, and the link is
here. Iran and India are just two of the nations
that have observer status and attend the SCO meetings.
They are privy to discussions and strategic planning,
including plans to defend its members from the old
economic order’s ongoing financial crisis. This is why
we should regard Iran’s gold purchases as an important
signal and why we may be mistaken to dismiss India’s
purchase from the IMF as just opportunistic. The gold
purchases of the SCO’s participants follow a clear
pattern and look like an early indication of an emerging
new financial, as well as economic order.
The
reasons why the SCO’s participants are adding to their
gold holdings should also be considered in the light of
the West’s continuing and possibly deepening financial
crisis. China, for example, has ended up being exposed
as the largest single holder of US dollars and debt,
having accumulated this position through currency
intervention. To the extent that this is regarded as the
price of a successful economic plan, China’s dollars are
therefore expendable: the value of the dollar has been
important for fixing terms of trade, but not as a store
of value in China’s foreign reserves. Put yet another
way, if you value precious metals and important
commodities, you will not regard dollars as your store
of value.
The
same must apply to other paper currencies, which
explains why China’s flirtation with the euro was brief.
And not only is China adding to her own gold reserves,
she is also happy for her people to buy gold and
silver. Russia hoards all the gold she mines. The other
SCO members are acquiring gold, admittedly in smaller
amounts, or have ample stocks in the ground. The message
is clear: the long-term success and stability of the SCO
will be based on sound money, or at least money more
sound than the fiat currencies of the West. And this
being so, it makes sense to place a lower value on trade
with the West, because the West pays for goods by just
printing the money. It has become more important for
SCO participants to use worthless dollars to position
themselves for the future than continue to finance the
West’s profligacy. This is why the SCO is the future for
Asia and promises to become the biggest economic bloc
ever seen.
Reading the English version of the Bishkek Treaty of
2007 one is struck how similar many of the objectives
are to those of the Treaty of Paris in 1951, which
marked the founding of the European Coal and Steel
Community. The crucial difference is the SCO does not
seek long-term political unification, but the
co-ordination of common security and economic
development. This means that laws will continue to be
decided at national level, so the over-regulation and
central bureaucracy that emasculates business in the EU
and America should be avoided.
The
SCO’s structure is therefore less political and more
flexible. This is how China will co-exist with India,
India with Pakistan and Russia with her former stans.
It is intended to defuse the border disputes of the past
by allowing common interests to overtake them. The SCO
will represent about half the world’s population, the
largest grouping imaginable, making Europe and America
look like two-bit players.
So
where does this leave the old economic order with
respect to the new? If we think we have financial
leverage with all those dollars and Treasuries owned by
Asians, it is more limited than we think. Furthermore,
forget the idea that China will protect her dollar
interests by buying more Treasuries: her dollars are
more likely to be spent on natural resources and
precious metals. If we think China is dependant on trade
with the West, any such dependency is limited and
temporary, since China sees the West as merely a
stepping-stone into her own economic block: the SCO. If
we think China is dependant on the West’s financial
system, she has her own plans to extricate herself.
This
new economic order’s official languages are Chinese and
Russian, and it is these two nations who dominate the
SCO. Both are major gold producing nations, and both can
see how the West’s fiat currencies are destined for
collapse. Between them, they are resource-rich. Russia
is second only to Saudi Arabia as an oil producer, and
thanks to the post-communist liberation of her economy,
she has surplus grains and timber.
Russia, under Putin and Medvedev, is now strong again.
She learned the lesson of the risks of taking salt with
the West’s financial system in the crisis of 1998.
Since then, she has become progressively more
independent from the West’s financial troubles, and
presumably will wish to keep it that way. All her
future alliances will be on her own continent and under
her own control, which is why the SCO is important to
her. She naturally turns to China to protect herself
from the West; a tendency enhanced by China’s own
economic prospects relative to those of the old
capitalist economies.
As
the old economic order collapses, the SCO’s observer and
affiliate states will apply for full membership, and
others will soon be knocking on the door. Will they
include Turkey, who has been continually denied
membership of the Christian EU? Will they include some
of the Central European states, who have tasted EU
regulation and bureaucracy? Will they include
Afghanistan, Iraq, or even Saudi Arabia, disillusioned
by worthless dollars and American imperialism?
Time
will tell; but the attractions of a supranational SCO
seem certain to include a sounder currency than the
dollar, euro, pound or yen; if only because all SCO
parties are accumulating gold. Those of us who
myopically think gold has run too high too fast and are
praying for a buying opportunity on a pull-back, should
not forget that there are six SCO member states, four
observer nations, and two dialogue partners also buying
the dips. And if Iran is telling the truth about its
purchases, they are clearing Western markets out of the
physical.
So
if you want to buy a stake in the new economic order,
while shorting the old, buy gold.
3
November 2010
