Market Insights, The US Dollar

Will China Bring Us Back to the Gold Standard and Crash the Dollar?

Gold Alliance disclaimer

Over the years, China has meticulously focused on increasing its position in the world economically, financially, and militarily. Its success is built on trade deals, creating credit facilities, and setting up an alternative to the West’s SWIFT clearing system. In addition, China has rapidly increased its gold possession, which is now estimated at at least 20,000 tons. The US, by comparison, has just over 8,000 tons.

China seems to be on its way to, willfully, taking over the role as the leader of the world from the US. In a previous article, we discussed the US dollar, the primary reserve currency of the world, and the problems that it now faces. China is looking at the Chinese Yuan to be taking over the role of the world’s reserve currency as well, for the enormous benefits that the US has reaped for over 70 years from having the dollar be the dominant global currency.

Western  Country Gold Vaults are Bleeding

Meanwhile, China is readying a yuan-priced crude oil benchmark backed by gold, which will change the whole game. China imports roughly 3 billion barrels of oil a year, which amounts to $150 billion at $50/barrel. The yearly production of gold is 80 million ounces (2,500 tons), valued at a total of just over $100 billion at $1,300/ounce. In other words, one (1!) country consumes more oil than the global production of money. Think about that for a minute.

China imports around 2,000 tons of gold yearly, while India imports roughly 1,000 tons. Since the yearly gold production is 2,500 tons, where does all that gold come from?

The answer is clear: The US and the West in general are letting their gold reserves bleed so that they can pretend their currencies and the financial systems backing them are solid.

Why China wants a gold standard

Let’s say China pays for its oil with yuan, which it offers to convert into gold. Surely, not all oil producers will take them up on the offer to convert into gold—perhaps just 25% will. Either way, the question is how China and India will be able to import amounts of gold that exceed gold production. The straightforward answer is that they can’t, not at current gold prices. China knows this, so this means that China is preparing for a day when current gold prices are not relevant anymore. If this was not clear, let’s make it clearer. China and India are buying gold at a rapid pace because they know that the price of gold is going to skyrocket, and they will push it to do so.

China has been watching as US gold reserves have declined to disguise the credit bubble and exorbitant printing of US bills, and they don’t want to end up in the same situation should the yuan become the global reserve currency. Instead, China seems to be heading towards a new gold standard in order to turn “oil for US dollars” into “oil for gold”. This will only be driving up gold prices by offering much higher prices for its gold purchases. At the same time, by offering gold for oil, China is creating a demand that supply cannot meet—again, at current price levels.

The golden rule is – “He who has the gold makes the rules”

Being the largest owner of gold in the world, China is effectively increasing the value of its treasury, while other nations will find it almost impossible to accumulate gold due to the higher prices. In other words, China is securing its position as the financial leader of the world way into the future.

Gold is lasting wealth, and China is fully aware of it.

At the same time, China is effectively devaluing its own currency, the yuan, versus gold. To understand just one of the many advantages to devaluation, just look at history. The 1934 devaluation of the US dollar created inflation, which makes it easier to pay the debt while boosting the real economy.

Heading towards a gold standard means moving away from the dollar standard. As a result, the dollar will devalue versus the yuan because of decreased demand from oil trade and because of decreased power associated with no longer being the issuer of the world’s primary reserve currency. Let’s just hope that our country doesn’t take military action to enforce the dollar standard—a move we have taken repeatedly over the years.

China won’t have a de Gaulle Moment

More importantly, however, China’s path avoids bleeding out treasury gold. Should China convert yuan into gold it purchases on the open market—instead of digging into its treasury—they won’t face a “de Gaulle moment.” So, there may not be enough gold at the current price, but the price doesn’t matter to China because they’ll benefit from higher gold prices. What matters to them is that they don’t diminish their gold treasury, which they have accumulated with great care over the years. In other words, China won’t convert yuan into their own gold—they will convert it into gold they purchase on the open market.

China is able to just sit back and let “nature” create the new gold standard where they are the wealthiest ones. And this is something that has been in the works for a long time. In 1971, Chairman Mao said, “This is the beginning of the end for the dollar.” China’s actions are meticulously calculated and logical. We can call this “financial war.” The question is whether this could lead to actual war…

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