China's Silver and Gold Download

Somewhere in 18th century Scotland, a writer is making the rationalist case against gold and silver. I’ll conjecture such a counterpoint rebuttal to precious metal coinage (and convertibility of notes) has appeared on occasion during the entire 5000 year history of gold’s employment as money, if not longer.

Indeed, a modern version of the argument can be found today. You know the bullet points: gold has no earnings, no yield, cannot be valued by any reasonable metric, and is nothing more than a hunk of inanimate metal. More to the point of the rationalists is that gold has little value in use, and may actually be a religious object. Thus, gold trades in the medium of signs and symbols, and once discovered as such, will come in for a brutal puncturing. The problem I have with this argument is as follows: it’s irrational.

It would be one kind of argument to state that mud cannot be used in engineering to build skyscrapers. But it’s another kind of argument to claim that gold and silver have faulty internal structures too, that contain the seeds of their own collapse. Physics is physics. Money is psychology. Thus, the rational argument against gold and silver, because it presumes rationality in human beings, is irrational.

We shall see of course which forms of money the world will accept in trade for such things as grains, goods, and oil in the years ahead. Or perhaps even in the year ahead. Before World War II, in this century, that largely fell to British Sterling. Since World War II the preferred form has been the US Dollar. Both of these currencies also trade, and traded, in a universe of signs, and symbols. Indeed, they have traded as totemic accessories of Empire.

Now comes China however with its vast array of built capital stock and a great wall of monetary reserves. As I wrote in the Seigniorage Curse, the Dollar paradigm started out as a justified paper currency regime tethered to the productive and innovation capacity of the United States. But the regime wound up as a scheme to extract, not provide, value — and the multi-decade premium accorded to US purchasing power became the mechanism, in part, that hollowed out our economy through financialization. It’s not so surprising therefore that large holders of dollars–at this point in the dollar’s life cycle–would want to exchange them.

At Gregor.us I’ve been writing the past year about these issues with particular attention paid to the myriad ways China could convert dollars to other assets. But starting in August, both at GregorWeekly.com and also in my Gregor.us Monthly newsletter, I began to target my commentary more frequently to the issue of money itself.

China’s new September push, for example, to encourage investment in gold and silver amongst its citizens is nothing less than extraordinary. The promotion comes amidst a sense that the economic policy talks between Washington and Beijing, which surely take place on an ongoing basis, have perhaps not gone well of late. Each week brings another surprise too, from Hong Kong’s request that all its gold be repatriated from London, to yesterday’s rumor that China will ban all exports of gold and silver.

It appears that China has decided to leverage the sheer scale of its own population, to effectively download the world’s gold and silver into a billion different hands. The ability to buy precious metals at one’s local bank, in small bar denominations, is the distribution channel. Some have suggested this policy may double as a way to dampen currency based inflation internally. If that’s the case, then the question remains whether the state will use Yuan, Dollars, or both Yuan and Dollars to carry the new inflows of metal, into the country. We await that particular answer.

Photos: Chinese Coal Community, by Song Chao. | Untitled, by Wayne Levin, 2004.

Comments

[fishluvrain:]

Maybe the Chinese are embracing something more solid than credit to link to their currency. Should they encourage the population to store the metals ownership, price swings are distributed, less effect on the Chinese currency during metal price declines. People tend to rush out to buy after the price has advanced and sell after it begins to decline.

Sep 18 05:14 AM

[Clearbrook ...:]

Perhaps to avoid social unrest since I think those Chinese matresses of the biggest savers in the world are stuffed with dollars. Keep up the good work Gregor.

Sep 18 07:35 AM

[Vuke:]

The Chinese are now big players in a world economy. If they consider it wise for citizens to hold some gold and silver we should take the same message very seriously. Perhaps they sense something big is coming in currencies. As the biggest holder of dollars, they would know.

Sep 18 09:04 AM

[Alan Young:]

I understand that China is the world's largest producer of PMs. And they do not want to sell those PMs to get dollars; they already have more dollars than they want. So selling it internally is the answer. It makes good sense for them to have their citizens buy it.

We have social security. China has privately-owned gold. Let's see which system works better.

Sep 18 09:34 AM

[Willten08:]

This guy's writing is atrocious. Do some people actually pay for his writings?

Sep 18 11:08 AM

[ManAboutDallas:]

Once Hong Kong's gold is safely back in the new vault there in Hong Kong, watch China use the Hong Kong Dollar as a stalking horse for the Yuan by pegging the HKD to their gold and watching what happens. Never, ever forget that when dealing with China, NOTHING happens by "accident".

Sep 18 02:47 PM

[Old Trader:]

Gold is a traditional store of value all over Asia, so one can add the effect of investment in precious metals by India, and the newest little "Asian Tigers" (Vietnam, Indonesia, etc.) as their economies start to recover.

Sep 18 04:55 PM

[Ben Gee:]

Gold was universally valued because of its beauty. Now that gold will be available to the Chinese citizens, there will be a great market for it.Wanting to be rich was inbled in the Asian culture. Owning gold is one way to determine ones wealth. Since Chinese are adverse to spend their money, give them a chance to trade their money for gold may be a clever way to get the money back into the market place.

Sep 19 09:12 AM

[The Geoffster:]

"There is scarcely a state here today asking for the gold standard that is not within the absolute control of the Republican Party."
-William Jennings Bryan, Cross of Gold Speech to 1896 Democratic National Convention
Some things never change

Sep 19 07:39 PM

[Jan Paul:]

Watch the yuan as some say China is ready to start letting it appreciate again, to the dollar.

Now, regarding a gold standard.

The U.S. was still on a "gold standard" until 1971 internationally and the currencies were valued to it. The other currencies weren't for the most part, tied to gold but, because of their link to the dollar it was as if they were. Since we left that standard, many nations have had all kinds of problems with their ties to the dollar. For many, they say they ended up being the nations that the U.S. "exported" inflation to and got a free ride with its bad monetary and economic policies.

This may be behind the move to have gold included in the basket of currencies the SDR will be based on. OR, one nation, that is a global trader, goes to gold backed currency for trade. The other nations wouldn't have to go to a gold standard because their currency value would be set by the nation that they trade with that does have the gold standard.

Does China intend on being the nation that goes onto a gold standard?

Just some thoughts on why gold is getting more attention from China and the IMF and nations wanting the SDR's to be another currency for trade.

Sep 19 10:45 PM

[Bill Herbert:]

>>Once Hong Kong's gold is safely back in the new vault there in Hong Kong, watch China use the Hong Kong Dollar as a stalking horse for the Yuan by pegging the HKD to their gold and watching what happens. Never, ever forget that when dealing with China, NOTHING happens by "accident".<<

M.A.D. - You are so right. I would surmise that over the next few years, we will see China rapidly accumulating gold and other PMs, as well as building huge stockpiles of industrial metals. While some argue that this would be counterintuitive (driving down the dollar, thereby shooting themselves in the foot) I suspect that the Chinese have already calculated the inevitability of the US Dollar sinking much further, and don't want to be the lone soldier trying to hold the fort against economic reality.

In fact, this trend of dumping dollars quietly for REAL goods has already begun - I think China will also become very aggressive in terms of buying up mines, processing plants (mills), and so on over the next year or two.

For one thing, it is now pretty obvious that we will not have the 'global Armageddon' some were touting six months ago, and that prices will be headed in one direction for a long time - UP. That is due to the huge pile of paper money swirling around the globe - it will find a target in real assets. I believe the Chinese will be aggressive buyers of prime commercial property as well - it's sort of like a giant Monopoly game at this point - many very prime properties in major cities can be had for a big cash outlay, and can be refinanced later if needed at very low rates.

I'm buying miners, silver, gold and looking seriously at plucking some deep value from the distressed commercial REITs.

Sep 20 07:59 AM