Earlier this month, the US threatened to lock China out of the dollar system if it doesn’t follow UN sanctions on North Korea. Treasury Secretary Steven Mnuchin threatened this economic nuclear option during a conference broadcast on CNBC.
If China doesn’t follow these sanctions, we will put additional sanctions on them and prevent them from accessing the US and international dollar system, and that’s quite meaningful.”
The threat may be meaningful, but it also might be empty.
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.
It’s been a bad week for Bitcoin.
The price of the cryptocurrency continued its free-fall after one of the largest exchanges in China announced it was shutting down.
This follows on the heels of an article published by Caixin announcing the Chinese government plans to ban cryptocurrency trading on all domestic exchanges. Information coming out today seems to confirm the story reported by the Chinese publication. Cointelegraph reported, “information slowly appearing from China appears to confirm that trading will no longer be legal for Bitcoin-to-fiat platforms.”
The Chinese government appears set to take another step to crack down on bitcoin and other virtual currencies. Late last week, a Chinese publication announced the government plans to ban cryptocurrency trading on domestic exchanges. Reuters said a source with knowledge of the policy confirmed the plan is in the works.
This follows on the heels of last week’s People’s Bank of China announcement outlawing initial coin offerings (ICOs) and its order to halt of all related fundraising activity.
A recent move by China could take a big step toward dethroning the US petrodollar.
The Chinese have 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. An article in the Nikkei Asian Review explains the significance of the move.
London and New York dominate gold trading, but some analysts think Hong Kong may soon become a more significant player. Its success could solidify China’s place in the world gold market, strengthen the yuan, and shift more economic power from west to east.
Last May, Hong Kong Exchanges and Clearing (HKEx) announced plans to launch gold futures contracts.
Indians bought more gold in the first half of 2017 than they did all of the previous year, as the yellow metal continues to flow from the West to the East.
Indians within every economic class buy gold. Even the poor in India invest in the yellow metal. But demand for gold slumped to a seven-year low in 2016, leading some to wonder if Indians had lost their appetite for the metal.
The US government isn’t the only one piling up debt.
We’ve reported on the ticking debt bomb in the US. Apparently, the timer is ticking in China as well. This week, Moody’s downgraded the country’s credit rating from A1 to Aa3, and changed its outlook from stable to negative. It was the first downgrade of China’s credit rating since 1989.
Meanwhile, Chinese investors are buying gold.
Chinese investors are buying gold bars at a torrid rate. China’s appetite helped drive global demand for physical gold up 9% in the first quarter of 2017. Chinese investors gobbled up 105.9 tons of gold in Q1. That represents a 30% year-on-year increase, and was the fourth strongest quarter on record.
So, why the strong demand for physical gold in China? Mao Mao, a gold dealer in downtown Shanghai, told the Australian Financial Review she sees three major factors pushing the Chinese gold rush – and they all relate to fear.