Guest post by Jim Rickards
A Popular Myth
One of the most persistent story lines among gold bugs and market participants who foresee the collapse of the dollar goes something like this:
China and many emerging markets including the other BRICS are looking for a way out of the global fiat currency system. That system is dominated today by the U.S. dollar. This dollar dominance allows the U.S. to force certain kinds of behavior in foreign policy and energy markets.
Countries that don’t comply with U.S. wishes find themselves frozen out of global payment systems and find their banks unable to transact in dollars for needed imports or to get paid for their exports. Russia, Iran, and Syria have all been subjected to this treatment recently.
China does not like this system any more than Russia or Iran but is unwilling to confront the U.S. Head-on. Instead, China is quietly accumulating massive amounts of gold and building alternative financial institutions such as the Asia Infrastructure Investment Bank, AIIB, and the BRICS-sponsored New Development Bank, NDB.
Image credit: multiply.com
When the time is right, China will suddenly announce its actual gold holdings to the world and simultaneously turn its back on the Bretton Woods institutions such as the IMF and World Bank. China will back its currency with its own gold and use the AIIB and NDB and other institutions to lead a new global financial order.
Russia and others will be invited to join the Chinese in this new international monetary system. As a result, the dollar will collapse, the price of gold will skyrocket, and China will be the new global financial hegemon. The gold bugs will live happily ever after. The only problem with this story is that the most important parts of it are wrong.
As usual, the truth is much more intriguing than the popular version. Here’s what’s really going on.
Joining the Old Boys’ Club
As with most myths, parts of the story are true. China is secretly acquiring thousands of tons of gold. China is creating new multilateral lending institutions. No doubt, China will announce an upward revision in its official gold holdings sometime in the next year or so.
In fact, Bloomberg News reported on April 20, 2015, under the headline “The Mystery of China’s Gold Stash May Soon Be Solved,” that “China may be preparing to update its disclosed holdings…”
China’s gold production and net gold imports since 2000 (the import data shown above are adjusted for China’s re-exports of gold)
