Russia and China’s Golden Plan to Shift Economic Power East
Russia and China seem to be betting their monetary futures on gold. Their long-term maneuverings could seriously undermine the dominance of the US dollar and shift the world’s economic center of power from West to East.
Russia and China buy more gold than any other countries in the world, with Russia leading the way. Over the last decade, the the Central Bank of the Russian Federation has added more than 1,250 tons of gold to its reserves, according to the World Gold Council. At 1,700 tons, Russia’s has the sixth largest gold reserves in the world. Russian gold makes up about 17% of the nation’s wealth.
In 2016 alone, the Russian central bank purchased 201 tons of gold, far more than any other central bank in the world. The People’s Bank of China ranked second, adding 80 tons to its reserves.
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. Many analysts believe China drastically understates the amount of gold it owns.
Bank of Russia governor Elvira Nabiullina downplayed the Russian gold buying spree, saying the bank is simply seeking to diversify its reserves.
We are adhering to the principle of reserve diversification. This principle remains unchanged. From this perspective, our reserves do include gold.”
Gokhran of Russia operates under the Russian Ministry of Finance. The agency is responsible for the purchase, storage, sale and use of precious metals in the coutnry. Its gold holdings make up part of Russia’s official reserves. Gokran officials emphasized the importance of gold in the country’s long-term strategy.
Gold is one of the most effective investment assets in the long run – and the large volumes of gold purchased by both official and private investors globally show how attractive this asset is. During the last 15 years the price of gold has increased five-fold, although the price of gold can fluctuate a lot in the short run. Gokhran responds to the changing situation on the global gold market and – when market conditions are favorable – replenishes its gold reserves.”
Many analysts believe Russia and China are buying gold specifically to minimize their dependence on the US dollar. The two countries are also 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.”
China recently took a concrete step in this direction. In a move that could foreshadow the end of the US petrodollar’s dominance, China announced the launch of a gold-backed, yuan-denominated oil futures contract. The move potentially creates a way for oil exporters to circumvent US dollar denominated benchmarks by trading in yuan. The contracts will be priced in yuan, but convertible to gold.
In June, China took the first step toward establishing a “petroyuan” when it launched a direct trade relationship with Russia, allowing oil purchases to be made strictly in the Chinese currency. An article published at ZeroHedge highlights the significance of this move.
China is the world’s largest importer of oil, the vast majority of it still paid in US dollars. If the new yuan oil futures contract gains wide acceptance, it could become the most important Asia-based crude oil benchmark, given that China is the world’s biggest oil importer. That would challenge the two Wall Street-dominated oil benchmark contracts in North Sea Brent and West Texas Intermediate oil futures that until now has given Wall Street huge hidden advantages. That would be one more huge manipulation lever eliminated by China and its oil partners, including very specially Russia. Introduction of an oil futures contract traded in Shanghai in yuan, which recently gained membership in the select IMF SDR group of currencies, oil futures especially when convertible into gold, could change the geopolitical balance of power dramatically away from the Atlantic world to Eurasia.”
In simple terms, by leveraging gold to stabilize both the yuan the the ruble, China and Russia have set out on a path to undermine the dollar and US economic dominance, shifting the axis of economic power east toward Eurasia.
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.”
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