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Thinking Like China and the Road to $64K Gold

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A recent report by Bloomberg highlights that if China were to adopt a gold standard, it would look nothing like the traditional systems used in the past. Ken Hoffmann, Bloomberg’s Global Head of Metals & Mining Research, doesn’t believe conventional western wisdom can predict the actions China might take. In fact, he cautions that China will be more than capable of thinking outside the box. And if the rising Eastern power does transition to a gold standard, it would send the price of the yellow metal through the roof.

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China wants to establish the yuan as a global reserve currency. Backing it with gold would likely attract foreign investment. Here’s the catch — a gold-backed yuan would require either an exchange rate of about $64,000 an ounce, or three times more gold than currently exists in the world at current prices.

Hoffman said that while the traditional gold standard option appears out of reach, the financial world should not underestimate China’s ability to come up with a solution. Lawrence Williams of Mineweb reported on a presentation by Hoffman, who told his audience, “The world needs to think about China in Chinese terms” – not traditional western ones. Williams writes:

And if anyone has a good handle on Chinese thinking, with regular trips there and to Hong Kong, [Hoffman] is one of the better placed westerners to understand the Chinese psyche, and also the Chinese view of gold. This, he reckons, is the Chinese view of the gold standard as being an old system that worked rather than more recent Keynesian attitudes (gold standard is a barbarous relic etc.) which the Chinese feel may have led to throwing the global economy into relative chaos.”

A weakening dollar would push the price of gold closer to the target of $64,000 an ounce, and there are other unforeseen cards that could come in to play. For instance, the Chinese could unpeg the yuan from the dollar and dump its large reserve of US currency into the market.

Peter Schiff predicts that scenario will eventually come to pass as the Chinese realize the US debt position is unsustainable.

In fact, CNBC reports debt counts as the “real American growth industry.” The current amount of debt in the US stands at $58.7 trillion. That’s 3.3 times GDP and roughly 13 times the level just 35 years ago, according to data from the Federal Reserve’s St. Louis branch.

In a video released in January, Schiff said Switzerland provided a prelude for what will happen when the Chinese unpeg from the dollar when it abandoned its peg to the euro earlier this year.

Switzerland is a small microcosm of the bigger pegged relationship that is going to end. When it does, it will be much more spectacular. This was a tremor. When the Chinese decide to abandon their peg both for the Hong Kong dollar and the yuan, that is going to be a 10.0 on the Richter scale of economic activity. That is going to be huge. This time, it’s going to be the dollar that takes it on the chin.”

The bottom line is China desperately wants to raise the stature of the yuan and it needs to find some workable solution.

China hopes to have the yuan added to the Special Drawing Right, the IMF currency basket that includes the dollar, euro, yen and British Pound. Bloomberg Business reported, “The Bundesbank said in April that the yuan needs to be seen as freely convertible before it can be considered as part of the SDR basket.”

The US opposes bringing the yuan into the IMF Special Drawing Right. But China is already thinking outside the box and moving fast. Williams points out the Chinese have already made moves to overcome American reticence:

Because of the virtual dollar hegemony which exists at present, and the apparent reluctance of the USA to allow China to progress in this manner, the Chinese have already been thinking outside the box and have moved at lightning speed (in global financial terms) to set up something of a rival to the IMF itself and World Bank in the Asian Infrastructure Investment Bank (AIIB). If they see continued USA-led opposition to their eventual desire for the yuan to become a fully tradable reserve currency, perhaps pari passu with the US dollar, then their outside the box thinking may well persuade them to somehow play the gold card – but exactly how this would be achieved is uncertain. But do not underestimate the capacity of the Chinese to come up with their own workable solution to what seems to be seen in the West, as an unlikely – perhaps impossible – option.”

Could another possibility involve unpegging the yuan from the dollar?

Gold has been steadily moving from Western vaults to Asian markets. China’s economic growth has been staggering over the past generation, propelling it to the forefront of global markets. It seems a new paradigm is in the making, and perhaps that paradigm includes a version of the gold standard that Western systems can’t even imagine.

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