Top Billionaire: China Preps for War with U.S. by Buying Gold
Ray Dalio: China’s buying gold to prepare for war with the U.S.
Ray Dalio doesn’t like the tensions building up between the U.S. and China. It’s a 2016-style flashback, intensifying quarrels with China over global trade. At the same time, 2016 was a while ago!
We can no longer call the U.S.-China conflict a “trade war,” because there is a real and ugly war going on in Ukraine. The U.S. and China have been drawn into the conflict, to greater and lesser degrees. If we’re to discuss angles, the U.S. attached Russia from the front with SWIFT sanctions and oil embargoes, while China used the opportunity to buy cheap Russian oil (while cutting backroom trade agreements with a number of nations).
So this round of the supposed trade war between the U.S. and China will be nothing like the prior, for reasons that extend far past guns and ammo. China has seen an opportunity to finally upset the petrodollar and is going for it. Dalio, in his interview with Kitco, explained how natural resources have become the real weapon. (Those in Ukraine might disagree.)
From South Korea to Saudi Arabia, nations are essentially declaring their loyalty to the West or to the East. Their decision is the answer to a simple question: Who’s our most important trading partner? Which is another way of asking, Can we survive more easily without the U.S. or without China?
While Dalio discusses military scenarios, the truth is that military action between the U.S. and China doesn’t need to happen. Truly, this might be the first war between superpowers fought and won without guns.
Dalio is no stranger to gold investment and advises investors to buy it for safety, taking a note that central banks are doing the same. He doesn’t appear to have had time to mention in the interview that China officially bolstered its gold reserves for the sixth straight month. April’s 8.09 tons brought the official gold reserve to 2,076 tons, though the general consensus is that China could have 5 to 10 times as much gold. It’s been said time and again that the country constantly buys gold and doesn’t report it. Would it be such a stretch to say that it’s doing so now because it’s sending a message?
I would argue yes indeed, China is sending a message… Physical gold is the only form of wealth that can’t be canceled.
And probably the only form of wealth that will never be turned down. Especially when it’s near its all-time high price…
Gold’s recent brush with a new all-time high price
It’s sort of strange to say that gold has had three all-time highs in four years. When the metal hit $1,910 in 2011, the price of gold didn’t stay that high for that long. Its fall was precipitous and the opinion was that we’d seen the tail end of a bull market was everywhere.
When gold hit $2,070 after months of lockdowns, no one was really surprised. Gold had been gaining steadily heading up to 2019 and throughout, but not quite enough to warrant such a leap in price. As the crisis seemingly subsided, so did prices. Yet the Russian invasion of Ukraine brought gold to $2,070 again almost unexpectedly. It was another crisis, but not nearly of the same magnitude on the global stage.
The latest thing to drive gold near $2,080 again appears to have been signals of a pause in interest rate hikes. That’s no crisis news: if anything, it’s crisis relief. So we’re sort of wondering what’s going on with prices. It’s clear that $2,080 represents some kind of resistance level, and that a climb past $2,100 will likely mark the start of another bull run in this cycle.
Gold’s retracement from these levels is also going to be very important. Gold’s fall from $2,070 to $1,650 in less than a year as the world realized Russia isn’t going to bomb us all was no small thing. The latter levels brought it right back to “okay”, pre-hyperinflation price targets of 2019 and earlier. Now, it has fallen back to $2,016 as of today’s spot market opening.
One important takeaway is that gold didn’t fall below $2,000 last week despite this being listed as perhaps the most important resistance. Where gold moves from now, in the coming weeks and months, will tell us how soon the gold bulls will stampede. If gold manages to stay above $2,000, it’s going to be hard to deny that the metal is in a bull run for the ages.
Would that be good news or bad news for a nation tied to the gold standard?
Zimbabwe: The first nation to return to a gold standard?
Our very recent report of Zimbabwean digital gold had a “coming soon” disclaimer. Well, apparently sooner is now… This week, the nation’s central bank (Reserve Bank of Zimbabwe or RBZ) will launch a digital token sale, to be finished by May 10 with a 180-day vesting period. They’re really going in a different direction than their July 2022 launch of physical gold coins, aren’t they?
These new “GoldBacked Digital Tokens” will have a minimum buy of $10 for individuals and $5,000 for institutions. RBZ launched them to “provide investors with a platform to save, invest and transact in gold.” A few more details:
This sort of language sounds mighty familiar — rather like I’m describing a cryptocurrency initial coin offering (ICO), doesn’t it? Sounds like Zimbabwe’s central bank just copy/pasted an ICO press release.
A little affirmation for the cryptocurrency market, for sure, but perhaps even more so for gold. The more I look into Zimbabwe’s gold-is-money-again effort, the more I wish the U.S. would return to a proper gold standard. In fact, the only real upside I see is that Zimbabwe’s digital gold is redeemable for gold bullion straight out of the country’s $100 million gold reserve. According to the World Gold Council, Zimbabwe enjoyed a respectable 19th place on the list of top gold mining nations in 2021.
But, by its very nature, the GoldBacked Digital Token will require the use of digital wallets and obviously come with a host of surveillance concerns and privacy issues. Zimbabwe’s token is also centralized, which theoretically makes it less appealing than even the volatile bitcoin as a store of value. Physical precious metals and cryptocurrencies aren’t the most similar assets, but they do have one major factor in common: neither relies on a centralized institution to establish either its supply or its value.
Remember, the entire reason the U.S. abandoned the gold standard fifty years ago was because there were more claims on the gold reserve than there was gold. What, exactly, prevents Zimbabwe from making the same Modern Monetary Theory mistake?
To add insult to injury, Zimbabwe’s digital gold sells at an eye-watering 20% premium over spot. I could maybe understand why the 2022 Zimbabwe gold coins commanded such a premium, even though it’s steep for what’s supposed to be legal tender. Mints have gotta make their cut, too. But digital currency? That’s a claim on gold that’s already been mined, refined and vaulted.
I’d argue that this steep premium over spot price for what is, once again, a digital product is a rather cynical tax on the poor. Those with the means will get on a jet, fly to Dubai and buy their gold out of a vending machine. (Or, if they’re really smart, purchase their gold and have it shipped directly to a precious metals depository.) Those who can’t afford to buy gold an ounce at a time will be stuck fighting both inflation and a big premium, struggling with a government-designed digital wallet to pay for their groceries. Fractional gold already exists! You can buy Goldbacks starting well under $10 and have the gold in your own hands.
I’ve given this a lot of thought, and it seems to me that “digital gold” has all the weaknesses of fiat currency and cryptocurrency combined. Think about it: you’re still relying on a central banker not to “print” too much of it. You’re taking on faith that it’s worth something. Now you have a new digital account at risk of being hacked or stolen – and it only works as long as the Internet does! Say what you will about the greenback, if nothing else it’s still there when the lights go out.
As if we needed to be reminded that news from faraway, third-world countries hit close to home these days, Texas is likewise proceeding with its gold-backed digital currency. From what we know, it’s a copy of the Zimbabwe model – with all the drawbacks I just mentioned.
Since the U.S. isn’t Zimbabwe (at least not yet), I’m left wondering… Why wouldn’t you simply buy gold American eagles instead?
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