China and Russia Cozying Up Around Gold

Russia and China have gotten much cozier over the last several months, and the two countries are reportedly working to develop a joint organization of trade in gold. This could have a significant impact on both the dollar and the price of gold.

The Chinese began laying the foundation two years ago.

In June 2015, the Chinese central bank announced its gold holdings had grown by 57% to about 1,658 tons. It was the first official update to China’s gold reserves since 2009. Since then, the Chinese have aggressively added to their holdings and taken other steps to increase their influence on the world’s economic stage.

That same year, a Chinese bank joined the twice-daily gold price fixing process run by the London Bullion Market Association (LBMA) for the first time. In May of last year, China’s largest bank purchased a huge London gold vault, further expanding its influence in the world gold market. Perhaps most significantly, China announced its largest gold investment fund ever in 2015. At the time, MarketWatch reported on the ramifications of the “Silk Road Gold Fund.”

“In addition to buying stakes in gold-mining projects and companies in the New Silk Road area using ‘private-equity and venture-capital methods,’ the new fund would also be used to invest in gold-miner stocks and to set up gold exchange-traded funds … The fund may also boost China’s power over the world gold market and could increase the use of the yuan in pricing gold …”

Russia has also been heavily involved in the gold market. Along with China, it has ranked as one of the world’s leading buyers of gold over the last couple of years.

With a foundation in place, the two countries are reportedly moving closer to developing a gold-based trading system. On a visit to China last year, the deputy head of the Russian Central Bank Sergey Shvetsov told TASS that the two countries want to facilitate more transactions in gold.

“We discussed the question of trade in gold. BRICS countries are large economies with large reserves of gold and an impressive volume of production and consumption of this precious metal. In China, the gold trade is conducted in Shanghai, in Russia it is in Moscow. Our idea is to create a link between the two cities in order to increase trade between the two markets.”

Other developments underscore the increasing cooperation between the two countries. Last month, the Central Bank of Russia opened its first overseas office in Beijing. Meanwhile, the Industrial and Commercial Bank of China (ICBC) officially started operating as a Chinese yuan clearing bank in Moscow.

Russian Central Bank deputy head Dmitry Skobelkin said this marks “a new level of financial cooperation.”

“The launching of renminbi clearing services in Russia will further expand local settlement business and promote financial cooperation between the two countries.”

So, what does all of this really mean? Well,  it could have a major impact on the dollar, as ZeroHedge explains.

“In other words, China and Russia are shifting away from dollar-based trade, to commerce which will eventually be backstopped by gold, or what is gradually emerging as an Eastern gold standard, one shared between Russia and China, and which may day backstop their respective currencies.”

In fact, Daily Reckoning analyst Byron King dubbed it the de-dollarization in trade between the world’s largest nation and its most populous.

“Up to now, there has never been anything approaching a serious challenge to the global supremacy of the dollar — certainly not in global trade. Yet here we are, watching Russia and China set up a proto-trading system based on gold. The daily quote for gold seems not to price in even a hint of this development. Yet it could have world-altering implications as it all unfolds.”

If gold-based trade expands to other BRICS nations (Brazil, Russia, India, China and South Africa), it could turn the dollar into more of a regional currency.

“Sooner or later, we may see more and more countries break away from the dollar collar and join the gold-trading world. In that case, gold prices will soar and shares in well-run gold mining companies will explode upward.”

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