Why Is Gold in China Worth More than Anywhere Else?
Why Chinese gold premiums recently hit record highs
Alasdair MacLeod delved deep into a few gold market highlights recently, with the primary story explaining Chinese gold premiums. This isn’t “merely” a case of gold outperforming in a non-dollar currency, as has been the case in virtually every foreign country.
No, Chinese gold is, simply put, more expensive to purchase. Last week, premiums on the Shanghai Gold Exchange rose to $120 over the London price. What’s more, Chinese shoppers were willing to pay the higher price. Why?
MacLeod explains how gold is the only flight of option because of Chinese capital controls: Citizens can’t merely just diversify foreign currencies (forex), with gold being the only inflation-resistant asset available to the everyday household.
But given the choice to jump into the U.S. dollar or the British pound, would they take it? And, for that matter, which price of gold is correct: $1,900 or $2,000 per ounce? These might turn out to be more complex questions.
So why is China’s demand for gold so insatiable? Currencies, whether the dollar or the yuan, simply don’t protect wealth as well as gold. We know this! Gold has leapt from $1,600 to $1,900 over the past few months, when measured in dollars. (That’s the same dollar which everyone seems to have written off already.) Granted, other currencies have fared worse. Inflation here in the U.S. has been bad, but it’s been worse elsewhere – 6.1% in Germany, 6.8% in the UK, 9.5% per month in Turkey. It’s no coincidence I’ve covered stories on record-shattering gold demand from each of these nations…
Chinese citizens couldn’t buy U.S. dollars easily, even if they wanted to. And really, any foreign citizen choosing U.S. dollars as over gold as an inflation hedge must only doing so because the metal is a tangible, limited resource. It’s not something a bureaucrat can wave a magic wand and create more of.
Having said that, we have to wonder which price is correct indeed. The London and Shanghai gold exchanges each set their own prices. Who’s to say that the Shanghai price fix is less accurate? After all, KingWorldNews outright claims that $1,900 gold in the West is the result of Western price suppression, and the Shanghai price is closer to the truth.
MacLeod’s ideas on a gold-backed BRICS currency are worth your time. He believes the shared currency was initially planned, but later turned unfeasible. It’s possible they wanted to give the six new BRICS member nations time to add to their own gold reserves?
He may be on to something there. I firmly believe we will still see a gold-as-currency announcement from BRICS.
What the U.S. dollar can hope to learn from the yen’s current predicament
The story of the yen is perhaps the most relevant thing going on in the gold market right now. And, as one might expect, it continues to fly under the radar. We can go back to 2016 or even just two years ago to see elaborations on why the Japanese yen is a “safe-haven currency,” even though as we’ve just explained, this is a nonsensical claim. Blue-chip currencies: U.S. dollar, euro, British pound, Swiss franc and Japanese yen – isn’t that how the list goes?
Today, that list looks like it was written in a different era. Almost right after the second article was published, gold began to appreciate massively in yen terms, an 18-month long bullish affair that appears to only be getting underway.
Gold is posting one all-time high after another in yen. Even the most backwards economist knows that, for all the fancy analysis, gold skyrocketing in a currency means that currency is fading. When gold hits all-time highs across the board, that simply means global, coordinated currency depreciation.
As if that point needed corroborating, the yen has had terrible showings against the U.S. dollar. Last year, its loss of value against the dollar triggered central bank intervention. This year, the passing of the same level was mostly ignored by the official sector.
The issue of the yen lies in the Bank of Japan’s ultra-loose approach to monetary policy, which can be inferred from one U.S. dollar being worth 147 yen. And one thing we know about loose central bank policies is that they are difficult, if not impossible to rein in. If there is a blueprint for it, it’s a well-hidden one. The closest we can think of is the 1970s tightening by the legendary Federal Reserve Chair Paul Volcker… But that was again followed by loose monetary policies. And the Bank of Japan is neither willing nor able to put on such a show.
What are the lessons for the U.S. dollar here? It’s worth reiterating that there is no such thing as a safe-haven currency. That’s an illusion created when some currencies plummet more in value than others. At best, a “strong” currency is simply the slowest loser. The aforementioned basket of just five blue-chip currencies that were respected is now down to four. The big four are strong against countless others, but they are exceptionally weak compared to true hard currencies such as gold and silver (and even many top cryptocurrencies).
Why the Fed’s boom-and-bust economic cycles could soon look like a lesser evil
Could we find ourselves in an environment where we long for the Federal Reserve’s boom and bust cycles? It seems so unlikely now, because the Fed has been behind basically every economic issue we have on our hands today.
Gary Tanashian weighs the likelihood of stagflation against deflation or hyperinflation. It’s a way to frame his argument that a change in global economy might be underway, and that it isn’t likely to benefit us.
Tanashian spends some time talking about deflation as if it’s some kind of boogeyman. (Really, what he means is hyper-deflation, or a sudden deflationary hit.) If we could be convinced a steady inflation rate is absolutely necessary to a functioning economy, is it really that hard to believe a little deflation could be beneficial as well? Mark Mobius has spent a good part of his life presenting hard evidence in favor of this argument.
But extremes are what we are dealing with, and Tanashian says that things will continue to have a familiar feel until they no longer can. It’s hard to deny that there is a feeling of the Fed being near exhaustion when it comes to options. Printing trillions of dollars must be extremely tiring, after all.
We’re now facing a liquidity squeeze that could, for lack of a better word, be called deflation. But it’s inflation (the opposite) that’s on everyone’s mind, and prices keep going up. It’s basically foregone that this liquidity squeeze is going to cause another pump into the system, and the bigger the pump, the harder the liquidity squeeze after it.
The extent of the previous bout of quantitative easing makes Tanashian believe that hyperinflation of some kind will become unavoidable. The world could, in the not-too-distant future, find itself in a position where assets or even goods are what everyone wants – and currencies no longer have any relevance.
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