"The U.S. should be afraid, very afraid. China is questioning the dollar's status as a reserve currency and, at US$1,000 an ounce, gold has become the world's de facto currency" -- John Ing, Maison Placements in Canada
It is a chilling statement from an expert on both gold and China. But he is just speaking truth to power: In a G2 world (the United States and China), the piper calls the tune and China holds a US$2-trillion mortgage on the United States and is not happy. This country, along with others who lend money to the United States such as Saudi Arabia, will determine the value of the U.S. dollar and gold. And they have spoken. They are not buying more U.S. treasuries and are buying gold as a newasset class. China announced that it was doing so quietly and recent reports are that the Saudis and others have been buying bullion and hocked gold jewellery from around the world to bemelted down inMiddle Eastern refineries.
The onlyway is up for gold prices because the U.S. backstops the IMF, the world's lender of last resort, and has had to become its own lender of last resort.
Washington has cranked up the printing presses in an unprecedented way, replicating the behaviour of its spendthrift corporations and consumers. This year's budget is US$3.5-trillion, bigger than any in history including Napoleon's when he was taking on the British, Germans and Russians at the same time.
And as Ing points out, the "bi" in this bipolar global economy is China and it is not amused. Beijing has not only started to hoard gold but has also continued to talk up a newreserve currency concept to replace the U.S. dollar.
The writing's on the wall and the only reason the Chinese and others don't dumpU.S. dollars is because it would be like shooting themselves in the feet.
Inflation, on top of excessive money supply dilution, will (unless mitigated by growth or stoppage) reduce the dollar's value. Ing estimates that the printing of money to bail out banks, autos and the U.S. economy will create a catch-up in gold bullion prices: "Gold should be US$9,000 an ounce to cover the [current and projected] U.S. monetary base." China has become the world's fifth-biggest gold hoarder, in addition to being the world's biggest gold producer (through its government- owned mining companies).
I also suspect that China is behind the political sabotage in Mongolia, to its north, which has for five years prevented Ivanhoe Mines of Vancouver from producing gold and copper from its massive discovery.
Keeping supplies off markets, and massive ore bodies shut in, is a good way of jamming prices upward.
Clearly, China has been disinvesting from the U.S. dollar also by getting slowly into hard assets (stock, commodities or ore bodies), which I have written about.
This concerns Washington, which is why Hillary Clinton, the newly-minted U.S. Secretary of State, made her first state "house call" in Beijing to make nice with the America's first mortgagor.
At that time, and publicly too, China warned the United States about its dollar woes, while suggesting a basket of currencies to replace its pre-eminence. These scary pronouncements were followed by an announcement in Washington a few weeks ago that there would be a massive U.S. treasury buyback of U.S. bonds. Put another way, the Chinese and others aren't buying anymore so the surpluses are being mopped up by putting more on the taxpayer tab.
