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The latest gold-price rally and explosive growth of the BRICS portend a financial earthquake.
“The world hasn’t woken up yet. The marginal buyer of gold is no longer the U.S. It’s no longer Europe. It’s China…. China takes up over two-thirds of all the annual production….That’s where the gold price is set…”
—Pierre Lassonde, Chairman Emeritus at Franco-Nevada Corp.[1]
When we witness dramatic moves in gold, it is always sensible to look for the “why” behind the media’s offered “explanation.” A gold rally of power unseen for more than three years launched at the beginning of March (although the underlying gold “bull” began in October 2023). Since October, we have seen the gold price (taking the June 2024 futures number) rise from about $1,850 an ounce to about $2,350 an ounce. But fully $350 (70%) of that rally has happened since March 1.
The “why”? Well, U.S. Federal Reserve Board Chair Jerome Powell commented at the Fed’s March meeting that Fed interest-rate increases were probably over. And the consensus of Fed members has been that 2024 will see two or three quarter-point cuts in the rate. That estimate of course is jostled almost daily by investor optimism, comments by individual Fed members, and new numbers (jobs, inflation) seen to affect the rate of future Fed interest rate changes. Ho-hum.
And then, there is war between Israel and Hamas, with constant provocations and threats by Iran of wider war. And there is the war in Ukraine. And there is virtually limitless, never-ending media angst over the possibility that Donald Trump will win the election in November. And there is a wide (and correct) public perception that inflation is much higher than indicated by the monthly Consumer Price Index (CPI) and Producer Price Index (PPI) numbers fed to us by government.
But none of this is exactly new, not even expectations of an eventual Fed pivot to lower interest rates. And for literally years now, the price of an ounce of gold has hovered around $2,000 an ounce—a level unthinkable even a few years ago. It has been as though nailed at that lofty level, which it first breached in 2020 during the pandemic. It has stayed there despite sky-high interest rates, traditionally negative for gold, which is an asset that pays no interest. So, really, gold did not have that far to go to rally to new (nominal) all-time highs.[2]
That, in a sense, is much more interesting (except to investors in gold) than the recent explosive rally. And the explanation is rarely seen in the financial news. Americans in general have not woken to it.
Who today sets the world price of gold? It is not the United States and not Europe.
Who today sets the world price of gold? It is not the United States and not Europe. The concept of the marginal purchaser becomes germane, here. It is a bit complicated, but it means the party who at a given time, at a given price, is always a buyer, but at a higher price is not. Some will want to debate that definition, but put simply we are talking about the prime, dominant buyer. And that, today, is the People’s Republic of China (PRC).
Broadly, the chief buyers of gold have not been investors, whose present portfolio holdings of gold (for example, through the huge GLD exchange-traded fund) are vanishing small by traditional standards; it has been the central banks of “emerging countries.” They were led by the PRC central bank (and, also, Chinese citizens protecting against turmoil in the property and stock markets).
Between China’s central bank and the Chinese public, China now takes up two-thirds of the world’s annual gold production. The People’s Bank of China (PBC) bought more gold than any other global central bank last year, a net 225 metric tons according to the World Gold Council. Gold has represented China’s largest expansion of its reserves since 2017. And China’s pension funds, insurers, and other state-linked investors are “all-in” for gold, their purchases often undeclared.
During the first two months of 2024, China imported 367 metric tons of gold for non-monetary use, a 51 percent increase from the same period last year. Sales of gold jewelry and gold coins and bullion in China rose 24 percent year over year.
In February alone, China added 390,000 Troy ounces of gold. In total, it holds 73 million Troy ounces or 2,257 tons of gold.
According to Bloomberg (in early March 2024), “China has added to its gold coffers for 16 months in a row.” Its central bank is relentlessly diversifying its reserves into gold and out of the U.S. dollar. In February alone, the PBC added 390,000 Troy ounces of gold. In total, it holds 73 million Troy ounces or 2,257 tons of gold. Of that amount, the central bank bought 1,034 tons just in 2003.
The PRC—its citizens and, because of them, the Chinese Communist Party (CCP), which has maintained one-party rule (dictatorship) since October 1, 1949, now approaching 75 years—has no more sacred long-term goal than becoming world hegemon. To displace the United States, but more broadly the West, as the dominant world power politically, militarily, economically, and culturally. To do so—indeed, to move in that direction—is what has justified the one-party rule of the CCP in its own eyes and, it continues to hope, in the eyes of the Chinese public. The goal, as it exists in the “soul” of China (as well as we can ever understand that), is to restore China as “the son of heaven“—the nation above all others as it viewed itself for some 300 years or more. The last century or so, to China, has been a bitter humiliation at the hands of the West (especially the years up to the reign of Mao Zedong). And still today, China is not respected and revered as its history mandates. (See my review of Destined for War: Can America and China Escape the Thucydides Trap by Prof. Graham Allison, former dean of Harvard’s Kennedy School of Government.)
Chinese President H.E. Xi Jinping, speaking at the 75th session of the United Nations explicitly and categorically denied this. “We will never seek hegemony, expansion, or sphere of influence. We have no intention to fight either a Cold War or a hot war with any country….Let us join hands to uphold the values of peace, development, equity, justice, democracy and freedom shared by all of us and build a new type of international relations and a community with a shared future for mankind.”
As you can see, President Xi and the CCP have very special definitions of “hegemony” as they do of “justice,” “democracy,” and “freedom.” The Ministry of Foreign Affairs, in “Reality Check: Falsehoods in U.S. Perceptions of China,” explained: “The US sets standards for democracy after its own system, does not allow other systems, paths and models to exist, and gangs up with others to wantonly interfere in other countries’ internal affairs in the name of democracy. This…spells disaster for democracy….The American-style democracy is a rich men’s game based on capital.”
The same official document has this to say about China’s place in the world order: “Despite its claims that it doesn’t seek to block China from its role as a major power, nor to stop it from growing its economy, the US is actually deploying its domestic and external resources to unscrupulously contain and suppress China.”
The intention to recover its place under heaven, as world hegemon, has been widely described as a hundred-year plan.
The intention to recover its place under heaven, as world hegemon, has been widely described as a hundred-year plan. Again, that is political, military, and cultural, but it depends, at its root, upon China’s economic power in the world and over the world. I attempted to describe this still further in a review of Michael Pillsbury’s The Hundred-year Marathon: China’s Secret Strategy to Replace America as the Global Superpower.
China undoubtedly has come a long way toward this goal. But that has been chiefly at home, in its own ersatz market economy. The West, above all the United States, remains the world hegemon economically; the instrument of that hegemony is the U.S. dollar as the world currency, the “standard,” the unit of trade, bank reserves, and debt. (The real dominance of the dollar inheres in the denomination in dollars of the trillions of dollars in debt instruments—U.S. Treasuries. When central banks hold dollar reserves, it is not cash but U.S. debt.)
But China has a plan—and this one is not a secret. It is the intergovernmental economic-financial organization that is the alternative to the West’s network of powerful organizations (such as the International Monetary Fund, World Bank, European Economic Union). BRICS (Brazil, Russia, India, China, and South Africa) was founded in June 2009, at a “summit” held in Russia. But, as of January 1, 2024, the name became BRICS-Plus as it doubled in size, joined by Egypt, Ethiopia, Iran, and the United Arab Emirates. And then, on January 30, Saudi Arabia hastened to join. But now, 34 additional countries have announced that they wish to join BRICS-Plus—and to do so by the end of this year.
Reportedly, BRICS-Plus already has developed or is planning new alternative financial mechanisms to those of the West. In broadest terms, these include 1) the development of a blockchain and digital infrastructure to support new systems, 2) in particular, a new interbank payment and transfer system to circumvent the present worldwide SWIFT, and 3) many initiatives to gain momentum for a gold-backed currency that would replace the U.S. dollar.
Of immediate concern, perhaps, is the replacement of SWIFT; but the paramount goal for China is to replace the U.S. dollar with either a new currency or the Chinese Yuan. In either case, China knows that to have a chance, that currency must be backed by gold as the dollar is not.
This year, chairmanship of the BRICS bloc is held by Russia, and the next summit is in Kazan from October 22 to 24, 2024. Since Russia invaded Ukraine on February 2, 2022, it has been under Western sanctions that have frozen its sovereign assets, restricted its key imports, and locked Russia out of the SWIFT international banking system. These are severe, crippling restrictions. No state is more driven to push back against the existing financial order than is Russia.
China already has its Cross-Border Interbank Payments System (CIPS), intended as an alternative to SWIFT, but for now it interfaces with SWIFT. Russia also is developing an interbank transfer system and that would not interface with SWIFT.
That is what BRICS-Plus reportedly is all about: “de-dollarization,” SWIFT alternatives, faster growth rates for the “developing” and “emerging” economies, building the capital of its central banks.
And that is what BRICS-Plus reportedly is all about: “de-dollarization,” SWIFT alternatives, faster growth rates for the “developing” and “emerging” economies, building the capital of its central banks. Those reports often come not from the BRICS countries, but from those 30-plus third-world countries that for now are non-aligned, belonging to neither the Western nor the BRICS camp.
Probably Russia is permitted the chairmanship for now because of its perceived “victimization” by the U.S.-European financial order. But it is not difficult to understand why Iran and China would take Russia’s predicament very seriously—why they, too, have incentives to build alternatives to a U.S.-dominated world financial order. A significant portion of the world is always under the potential threat of U.S/European sanctions. Now, SWIFT (as never intended, the rules had to be changed) has been weaponized.
But is there any real doubt that it is only China, with its massive size and burgeoning economic power, that makes even semi-plausible the prospect of an alternative international financial system, and currency, to the U.S. dollar? Notably, China’s Central Bank now has reserves of gold second only to the United States (with its 8,133 tons, if the U.S. reports of its gold reserves, constantly challenged, can be believed). But other BRICS-Plus nations, current members and those waiting to join, include some with very substantial gold reserves, too.[3]
Can China wake up the world one morning with the announcement that there is a new currency now, backed by gold and perhaps even redeemable for gold? Or, alternatively, that the Yuan, backed by gold, is now the official currency of the 43 (?) BRICS-Plus nations, who will be banking, denominating their debt, conducting trade, and doing other economic and financial business in that currency?
Many arguments can be made against the likelihood of this. There is the unequaled “depth” of the vast U.S. capital markets, the huge percentage of dollar-denominated debt held by the world’s banks, the dominance of dollar-denominated U.S. stock exchanges, the FOREX foreign-currency exchange system that handles trillions in daily trades that are 90 percent U.S. dollars—and so on. “The United States has managed to create a very complex system, and it’s very powerful,” writes Ernest Hoffman, a reporter for Kitco News.
China and the other BRICS continue to actively convert their central bank reserves into gold bullion, accounting for most of the world’s annual gold output.
Still, China and the other BRICS continue to actively convert their central bank reserves into gold bullion, accounting for most of the world’s annual gold output. And continue to plan and develop their alternative intergovernmental financial systems.
What kind of scenario might change the betting on the success of a new gold-denominated currency anchored and dominated by the PBC and an instrument of the Chinese Communist Party?
Well, a good start would be a U.S. dollar currency crisis. In less than 26 months following the March 2020 COVID-19 economic lockdown and ensuing stock panic, the U.S. Fed expanded its balance sheet (the entire monetary base underlying the dollar) by an incredible 115.6 percent or $4.0-trillion brand-new dollars. That more than doubled the US. money supply.
As the famous economist Milton Friedman put it, in unforgettably blunt language: “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output [of economic goods].”
Inflation is an increase in the money supply. (The ensuing general increase in the price level is a consequence of more dollars bidding for a drop, or no change, or a relatively smaller increase in the amount of goods.) The Fed delivered to the United States, in the name of economic salvation, a 115 percent inflation (that it is now gallantly “fighting” as though it invaded from Mars). The translation into a general increase in the price level is not instantaneous nor always entirely obvious, but one result is that Americans are experiencing price increases bearing little relationship to the government’s official reports of “inflation.” And that infusion of $4.8 trillion in new money is so far less than 20 percent “unwound” by the Fed that Chairman Powell is again talking about “quantitative easing” (creating more money).
At the same time, the U.S. government has accumulated national debt now exceeding $37 trillion. (The entire U.S. economy represents an estimated dollar value of $27.97 trillion.) These are historically unprecedented numbers. They are numbers associated with “runaway inflation” and other currency crises.
In such crises (the one in the German Weimar Republic of the 1920s is the most famous example), the only salvation for individuals and governments is “hard money”—gold—that cannot be printed or digitally created. That is the money being accumulated now by the PBC bank and by Chinese financial industries and individuals at an unprecedented rate.
Possibly the gold market has “heard” this. It is almost certain that although China is not driving the immediate rally in the gold price, as the marginal buyer it will step in when there are the inevitable corrections or pullbacks in price to the level at which China is prepared to accumulate gold—and that will backstop the corrections.
The “scenario,” as presented here, is perhaps complicated enough, but one more element—for full explication at another time—ought to be at least mentioned.
The Fed and other central banks would like to do away with even paper money and coins, substituting for them a Central Bank Digital Currency (CBDC). Don’t hear much about it? Perhaps that’s because all polls here and abroad indicate people do not want a digital currency. And in response to a question recently, Fed Chairman Powell replied: “We’re not even close to it.”
Reassuring? But CBDCs are under active development by most countries—with a dramatic increase in such development over the last four years. The Atlantic Council most recently reported that 134 countries, with some 98 percent of global GDP, are exploring a CBDC. In 2020, the number was 35. The Fed, despite what Powell says, is conducting tests. Lynette Zang, a financial executive and analyst studying the issue, has a simple explanation. “Here’s the thing: their job is to lie.”
She adds that considering the public resistance to the idea, governments are going to have to…well…cram it down our throats. Zang comments in an interview with Kitco News that a crisis in the U.S. banking sector could be used to help clear the way for a CBDC:
“You need a crisis that’s large enough to scare the people to comply. And they’re going to give us CBDCs to go out and spend…. If you don’t have food, water, energy, security, barter ability, wealth preservation, community, and shelter, you’re not going to have choices. Because you’re going to be beholden to whatever they want you to do. They are working…at getting those CBDCs everywhere in the world.”
Zang believes, in retrospect, that Bitcoin could have been introduced as a Trojan horse for a CBDC.
“I don’t think it was a coincidence that it came out in January 2009 and quantitative easing started in March.” She believes, in retrospect, that Bitcoin could have been introduced as a Trojan horse for a CBDC. And so we come back to China. Suppose there is a genuine currency crisis in the United States, which would have an impact throughout the West—and elsewhere, of course. And suppose for our (by then) debased and essentially worthless dollars the Fed and other central banks propose a digital currency for all expenditures, investments, savings, and debt. Would you prefer the new “dollar” created by the central banks that brought us the currency crisis—or a new Chinese model, Yuan or otherwise, which is fully backed by gold, redeemable on demand in gold?
What could such a move, at the height of a U.S. currency crisis, mean? Does gold-mining company executive Frank Guistra overstate his case when he comments: “No one wants war, but here’s the problem—the U. S. is facing an existential threat. It’s a national security issue. If there’s a sudden move towards replacing the U.S. dollar, meaning perhaps a BRICS announcement of a new currency [backed by] gold, I think then [the United States]…would react quite violently.”
There are comparatively few examples in modern history of a nation that is a world hegemon permitting itself to be displaced and superseded without war. The explicit causa belli would not be “economic competition,” of course. But it might not even require a provocation like China’s almost certain eventual attempt to “reunite” with Taiwan. The feeling toward China would be such that a series of “non-negotiable demands” would arise, ultimatums would be delivered, and then war would be declared “inevitable.”
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[1] Franco-Nevada Corp is the leading gold-focused royalty and streaming company.
[2] Still, bullion has far to go to reach its inflation-adjusted peaks set more than a decade ago. Gold has risen more than 600 per cent since the turn of the millennium, though adjusted for inflation it remains below the high of US$850 touched in January 1980, equivalent to more than US$3,000 in today’s dollars. (https://www.bloomberg.com/ news/articles/2024-03-05/gold-climbs-to-record-as-momentum-builds-on-rate-bets)
[3] All BRICS combined have 6,149 tones of gold reserves; but the Western bloc boasts a reported 20,000 tones.
Note: This article was originally published by The Savvy Street and is republished with the author's permission.
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