Massive Gold Earthquake Now Shaking The Financial System

"...Since the collapse in 1971 of the old fixed exchange rate system under Bretton Woods, the world has been using the dollar as the international reserve currency.  While each country has control over their money and interest rates, the benchmark remains the US dollar.  However, in the past dozen years, the US federal monetary policy has been the world’s de facto monetary policy, a form of financial protectionism.  The dilemma for each country other than the United States is that a “made in Washington” policy is not necessarily, Beijing’s or Brazil’s policy.

Gold is a Default Currency

 

The US Federal Reserve has flooded the emerging markets with dollars.  However, with the slowdown, many emerging countries have seen their currencies drop against the dollar, causing them to purchase their currencies in a support arrangement.  Emerging markets now make up over half of the world’s GDP and what they do with their currencies or the US dollar has international ramifications.  For example, the coming showdown over debt could lead to a government shutdown and a collapse of the dollar when those dollars come home to roost. 

 

The big risk is that the emerging countries, in order to protect their currencies will wash their hands on America and Mr. Bernanke’s successor will have to live with the consequences.  After all, America is the world’s largest debtor and the emerging markets are the largest creditor and in diversifying their holdings into gold for example, they are only defending their purchasing power.

 

China too is making a major adjustment.  In warp speed fashion, it has loosened controls around the renminbi, moving the renminbi to the top 10 currencies and there is talk of backing the renminbi with a little gold.  China is the world’s largest gold producer and this year will prove to be the largest gold consumer, surpassing India.  The financial crisis gave China a vivid lesson depending on another country for its reserve currency.  The Chinese have a problem with what to do with their outsized $3.5 trillion of foreign exchange reserves. 

They are big holders of US Treasuries but will suffer big losses when the Fed exits the market.  China has hedged their bets and diversified.  It has been reported that they have been adding to their 1,000 tonnes of gold, which represents less than two percent of their reserves.  Even if China were to buy the next three years of total world output they would have less 10 percent of their reserves in gold, the average of most Western central banks.

Central banks hold a little more than 30,000 metric tons of gold or less than twenty percent of the above ground gold stocks.  United States is the largest holder at 8,000 tonnes with the IMF, Switzerland and now the Russians all now holding more than a thousand tonnes of gold each.  China, Russia, Kyrgyzstan, and Turkey are buying gold with their excess dollars.  Gold is an alternative investment to the dollar for these central banks.  Change is coming.  A stable international system has eluded the world since the end of the gold standard.  Perhaps the solution is back to the future.  Gold is the default currency..."

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