A number of readers and bloggers have recently suggested there must be collusion between America and China over the transfer of physical gold from Western capital markets. They assume that governments know what they are doing, so there is a bigger game afoot of which we are unaware.
The truth is that China and Western capital markets view gold very differently. You will hardly find anyone in the London Bullion Market who regards gold as money; and for them if gold is no longer money Chinese demand for it is not a monetary issue. Instead it threatens the bullion banks’ business that a useful financial asset, capable of earning many times its physical value in fees, commissions, turns and interest, is being leeched out of the market by Chinese aunties.
It is clear that nearly all Western central bankers share this view, believing that gold will never play a monetary role again. We also know that Marxist-educated government advisers in China have been sheltered from the Keynesians’ antipathy against gold and instead have been brought up on Marx’s belief that Western capitalism will eventually destroy itself. It therefore follows they believe that western paper currencies will probably be destroyed as well.
Otherwise we can only speculate, but the following conclusions about why the Chinese are accumulating gold seem to make most sense:
- There is a fundamental view in China that gold is ultimately money, so it is always worth accumulating by selling potentially worthless foreign currency.
- Encouraging her citizens to accumulate gold achieves two objectives: if they have real wealth to protect it makes them potentially less rebellious in difficult times; and secondly private buying of gold reduces the trade surplus, which in turn reduces the accumulation of foreign currency reserves.
- Gold is generally accepted as superior money throughout Asia, which is China’s long-term regional interest.
- The Chinese Government (and/or the Communist Party) is buying gold for itself. Assumptions it will use gold to beef up the renminbi makes little practical sense, beyond perhaps some window-dressing for currency credibility. Instead she appears to be accumulating gold for unstated strategic reasons.
- Keeping the West short of gold gives China huge leverage in today’s cold currency war, and even more if the currency war heats up.
The idea that America is colluding with China in the gold market must therefore be nonsense. The truth has everything to do with different philosophies about gold.
Advanced western economies have survived without using gold as money for a considerable time. Currency and credit inflation have created a modern finance industry wholly dependent on fiat paper and everyone in mainstream finance is conditioned to believe in the profitable world of fiat currencies. They are therefore predisposed to dismiss gold as never being money again.
That is why the West is less worried about losing physical gold than it should be, and China is glad of the opportunity to buy it. And she can be expected to continue to do so whatever the price, because she knows that in the final analysis gold is the only true money.
This article was previously published at GoldMoney.com.
If the western bankers believe that gold will never be the measure of money again, it’s only natural that they’d sell it to whomever, not just China. In fact, by keeping some around they’re compromising the validity of the theories on which fiat money is based. They should get rid of it all. But they haven’t. In fact, people all over the world, not just China, have more faith in gold than they do in their own fragile and ephemeral fiat money or even that of the supposedly powerful US. If gold become as unimportant in financial affairs as we’re led to believe, why is it’s current and future price so important and easily available?
Karl Marx had a poor understanding of economics – just David Ricardo (and co) and a poor understanding even of Ricardo.
HOWEVER one thing that Karl Marx gets right is to see through (indeed to mock) the idea that producing more money (or credit) leads to long term prosperity.
As Hunter Lewis points out (in “Where Keynes Went Wrong”)Karl Marx was laughing at what is now called Keynesianism long before J.M. Keynes was born.
So an OLD STYLE Marxist is a better guide to monetary policy than a university trained Westerner – or the banking establishment.
One last twist….
Modern Marxists (for example in Latin America) often follow a mutant hybrid version of Marxism (created by the Italian P. Straffa and others) which mixes Marxism and Keynesianism.
That is why Latin American nations (the ones controlled by the left – such as Venezuela and Argentina) get the worst of both worlds.
One point overlooked above is that gold is used for other purposes than coinage:
From Wikipedia: Besides its widespread monetary and symbolic functions, gold has many practical uses in dentistry, electronics, and other fields. Its high malleability, ductility, resistance to corrosion and most other chemical reactions, and conductivity of electricity have led to many uses, including electric wiring, colored-glass production, and gold leafing.
China has a strong industrial base.
Yes Mr Thompson.
Both gold and silver have many uses.
Whereas Bit “coin” (it is not really coins at all) has no nonmonetary uses what-so-ever.
One reason I am wary of it.
Yes, Paul, and surely the monetary use of bitcoin must be very limited as well.
In order to use something as money in a general way, it is necessary that it can be used reliably to attribute value to other things. This does not apply to bitcoin, which seems to be just a vehicle for laundering and speculation.
It may well be a technical achievement, but references to it as a revolutionary form of money are inaccurate and misleading.
I remain agnostic (not hostile) to Bitcoin Michael.
I am keenly aware that my dislike of it may, in part, be based on my dislike of Max Keiser (the main promoter of Bitcoin) a person I do not trust.
Libertarians dislike all governments – and I am certainly no fan of a government led by a Frankfurt School person such as Barack Obama.
But going over to Putin and the FSB is not the answer – especially if one has to peddle the tired Soviet era lies (which Putin and co do not really believe) that the American government is the tool-of-big-business and so on. Which is the stock in trade of Russian Television.