The global politics of gold

Alasdair Macleod – 27 September 2010

Very little attention is given to the global political consequences of the strength of gold, but we can be sure that the strategy analysts in the Pentagon and elsewhere are acutely aware of the difficulties created between the old communist bloc on one side, and America, the UK and Europe on the other. If they are not, they are not doing their job at a time when they know Russia is running spy networks in the US, and possibly knows what is left in Fort Knox down to the bar. The ex-communists are playing from a position of increasing strength, and the West from weakness; but the issues are complex, requiring some deductive guess-work.

The ex-communists include Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan together with Russia and China who are all members of The Shanghai Cooperation Organisation (SCO), which as a body “promotes effective cooperation in politics, trade and economy” between the member states. Russia’s involvement with the SCO suggests that she sees a better future politically and economically allied with China rather than Europe, which should come as no surprise.

Countries with observer status at the SCO include India, Iran, Mongolia and Pakistan, and dialogue partners are Belarus and Sri Lanka. It may just be coincidence that this group includes a substantial slug of the world’s gold reserves in the ground, and that eight of them have announced additions to their official gold reserves in the last eighteen months[i]. China and Russia between them account for 21% of global mine production, and small producers such as Kazakhstan have considerable reserves. It is of course unlikely that the SCO has any formal involvement in precious metals strategy as such[ii], but it is a suitable platform for co-ordinating gold strategy between member states.

The total declared reserves held by these members’ central banks is not substantial at about 2,100 tonnes, which is only 10% of the Western central banking cartel’s officially declared holdings. But both Russia and China are unlikely to have disclosed all their holdings. In this respect China and Russia have been particularly skilful, by at least announcing an increase in their reserves, rather than allowing speculation to run unchecked.

In contrast, the Western central bank cartel deliberately withholds information from the markets, lending credence to worst-case suspicions. They refuse to divulge leasing commitments and swap agreements. The Fed also refuses an independent audit of its gold reserves. While everyone accepts that central banks manipulate markets, the deliberate lack of information encourages suspicions that the cartel has little disposable gold left to deliver to the market. In contrast to the ex-communists, the cartel is managing information very badly.

So where does this leave the Pentagon strategists? They will probably surmise that control over gold markets has already passed from the Western cartel to the ex-communists. They should regard this as a development of the utmost importance, if they suspect that the Cold war has morphed into a financial war. And do not forget it was a financial war that forced communism to collapse twenty-five years ago, when America heavily outspent the Soviets with Star-wars. This lesson is not forgotten in Moscow and Beijing, nor should it be by the Pentagon which originally developed this strategy. Control of gold bullion markets is therefore of considerable strategic importance.

As if the Western central banking cartel didn’t have enough on its plate without this complication! Manipulating markets to keep the global economy on course is hard enough without other central banks seeking to undermine you for political reasons.

To complete the picture, we should look at it from the SCO group’s perspective. Russia and China drive the SCO forum, other members generally falling into line. The observers and dialog partners benefit from being fed useful information, which may explain why India, Sri Lanka and possibly Bangladesh[iii] have all bought gold. Russia may be more interested in her dominance of the world’s fossil fuel supplies, which leaves China in the driving seat for gold, while Russia imitates the three wise monkeys. This combination of energy and gold strategies is particularly unfortunate for the West.

There are two possible strategies that China might pursue with respect to gold. There is the obvious one: that she has too little gold in her growing foreign reserves, and perhaps finds gold to be more attractive than Western paper currencies. This is what is commonly believed in Western financial circles. But there is another possibility, which should worry the Pentagon, and is briefly as follows.

China only cares about gold to the extent that it gives her economic power over the capitalist world. She can see that the Western central banking cartel is running out of bullion as a result of long-term attempts to discredit it as an alternative to fiat currencies, and her intelligence sources or those operated by Russia may well confirm this. China is unable to intervene directly, because western central banks refuse to sell to her. And it would be unwise to buy gold in the market: such overt action would create diplomatic and trade difficulties, and probably lead to accusations that she was deliberately trying to destabilise the Western economic system. This would explain why China is prepared to turn the screw on the price by actively promoting gold and silver investment to her own citizens. And she can encourage other non-communist SCO participants to buy any official gold denied to her[iv].

So China now possesses substantial power over gold, having taken little more than apparently passive action; and every day that passes, every day her hundreds of millions of salaried citizens hoard a little more, the worse it is for the Western central bank cartel. As a result of China’s clever strategy the West’s attempts to suppress the gold price now face ruin.

Besides the factual content, the foregoing analysis is of course guesswork; but it illustrates the impossible problem the Western central banking cartel faces as it struggles to control a gold price fuelled by severe bullion shortages. It will have enough of a problem bailing out the bullion banks, without having to appease the spooks from the CIA and SIS.

There is in reality little the West can do, other than face up to the fact that their central banks have been entrapped. All actions, from closing the markets to outright confiscation will make things worse, not better. The former would create a widespread buying panic, and besides, gold would continue to trade in Hong Kong and most probably Switzerland. The nuclear option of confiscation of bullion for the European nations risks being challenged under Article 1 of Protocol 1 of European Convention on Human Rights, and by non-conforming governments on behalf of their citizens[v]. Such action would also severely disrupt over-the-counter derivative markets, the precedence would be bad for other financial assets and capital flight would be triggered.

The Fed et al will have little alternative but to dismiss the impending gold crisis as not affecting paper currencies, and peculiar to bullion, while at the same time they quietly bail out the bullion banks. After all, Keynes dismissed gold as a barbaric relic, and we all believe in Keynes, do we not?

—–

[i] Besides China and Russia, India and Sri Lanka have in the last year acquired gold from IMF sales. Both Kazakhstan and Belarus have added to their reserves. Kyrgyzstan and Tajikistan have added very small amounts to their reserves.

[ii] It is however involved in energy policy and cross-border infrastructure.

[iii] It seems reasonable to expect information available to India and Sri Lanka to be passed to Bangladesh.

[iv] The intelligence services erred badly in not stopping the IMF from selling to India and Sri Lanka. It would have been better for the IMF to sell secretly to the bullion banks to ease the market situation.

[v] Imagine the position of a Chinese or Russian national or entity with gold held at a depository in London. Confiscation would bring about a diplomatic crisis. Alternatively, imagine the outcry if such action was limited to gold held in the jurisdictions of the Western central bank cartel, applying only to their own nationals to the exclusion of foreigners.

Published by

FinanceAndEconomics

Alasdair started his career as a stockbroker in 1970 on the London Stock Exchange. In those days, trainees learned everything: from making the tea, to corporate finance, to evaluating and dealing in equities and bonds. They learned rapidly through experience about things as diverse as mining shares and general economics. It was excellent training, and within nine years Alasdair had risen to become senior partner of his firm. Subsequently, Alasdair held positions at director level in investment management, and worked as a mutual fund manager. He also worked at a bank in Guernsey as an executive director. For most of his 40 years in the finance industry, Alasdair has been de-mystifying macro-economic events for his investing clients. The accumulation of this experience has convinced him that unsound monetary policies are the most destructive weapon governments use against the common man. Accordingly, his mission is to educate and inform the public in layman’s terms what governments do with money and how to protect themselves from the consequences.

3 thoughts on “The global politics of gold”

Leave a Reply

Your email address will not be published. Required fields are marked *