Monday, May 18, 2015

Jim Rickards: Why Most Gold Bugs are Dead Wrong

Here is the latest article by Jim Rickards that lays out his views on why China is buying gold in full detail. The article repeats the points he made at his recent speech in Dallas, Texas that we covered here. Below are some quotes from this new article and then some added comments.

"One of the most persistent story lines among gold bugs and market participants who foresee the collapse of the dollar goes something like this:
China and many emerging markets including the other BRICS are looking for a way out of the global fiat currency system.
That system is dominated today by the U.S. dollar. This dollar dominance allows the U.S. to force certain kinds of behavior in foreign policy and energy markets.
Countries that don’t comply with U.S. wishes find themselves frozen out of global payment systems and find their banks unable to transact in dollars for needed imports or to get paid for their exports. Russia, Iran, and Syria have all been subjected to this treatment recently.
China does not like this system any more than Russia or Iran but is unwilling to confront the U.S. head-on.
Instead, China is quietly accumulating massive amounts of gold and building alternative financial institutions such as the Asia Infrastructure Investment Bank, AIIB, and the BRICS-sponsored New Development Bank, NDB.
When the time is right, China will suddenly announce its actual gold holdings to the world and simultaneously turn its back on the Bretton Woods institutions such as the IMF and World Bank.
China will back its currency with its own gold and use the AIIB and NDB and other institutions to lead a new global financial order.
Russia and others will be invited to join the Chinese in this new international monetary system. As a result, the dollar will collapse, the price of gold will skyrocket, and China will be the new global financial hegemon. The gold bugs will live happily ever after.
The only problem with this story is that the most important parts of it are wrong. As usual, the truth is much more intriguing than the popular version.
Here’s what’s really going on."
My added comments:
Jim's analysis in this article agrees with the information I see when doing research for articles here on the blog. I repeatedly see Chinese officials making it clear that they view increased voting power at the IMF and inclusion of the Yuan in the SDR basket as their highest priority goals. We have run numerous articles here from publications all over the world that report this to be the case. (Click here to see one example)
So why do so some gold advocates so strongly believe that China's secret plan is to overthrow the existing global financial system by replacing the US dollar with a gold backed Yuan?  
In doing research for articles here, I read both mainstream and alternative media sites to get as many perspectives as possible. It is on the alternative media sites that you find the gold advocates views. I believe that the reason they take the view that China is planning to back the Yuan with gold and basically overthrow the IMF is because they have a world view that does not trust the IMF or other central planning agencies. They believe another major crisis is near that will cause the public to lose confidence in the present system and turn back to a gold standard and that China will lead the way.
If tangible evidence that China is really planning to overthrow the IMF and replace the dollar with a gold backed Yuan does emerge, I will certainly cover that here. But so far, the available evidence I see does not support that view. Jim Rickards explains why in this new article. There is really no reason for Chinese officials or the Chinese central bank to get rid of a fiat based currency. They derive the same benefit from that system that the western central banks do. It makes more sense for them to use increased gold reserves to gain more leverage within the present system.
The available evidence indicates that all these central banks and the IMF view gold as an important reserve asset and they all hold lots of it. China needs a lot more in order to gain influence within the IMF so they are building up their gold reserves very quickly. All these central banks understand that gold is the core asset of last resort even though gold is no longer used to back any national currencies on a gold standard. I think its more accurate to say central banks are anti gold standard than to say they are anti gold. 
It is possible that some day the public will lose trust in the current fiat system run by the central banks. If that does happen, gold may well return one way or another into the monetary system. But for now, so long as there is confidence in the present system, I don't expect much to change in regards to gold's role in the monetary system. It's a core reserve asset and available to use as a last resort.
Those running the present system do not foresee another major financial crisis that would change their long term plans to continue the fiat system. They see risks to the system, but they view them as manageable risks. If they are right, China will just move forward slowly and steadily towards its goals of increased influence at the IMF and expansion of worldwide adoption of the Yuan. But that plan will move forward over many years and decades with most people not noticing the changes. 
Only another major financial crisis will get the attention of the general public and change the timetable. How the public would react to another major financial crisis (perhaps the biggest in history) is an unknown in a complex system. 

Many gold advocates believe we will see a crisis soon and it will bring an end to the central banks because the public will lose trust in them. Jim Rickards believes the next big crisis will lead to the IMF stepping in and using the SDR to resolve the crisis at a global level. They both think gold will go much higher, but for different reasons. Those running the present system think they can manage things to avoid another major crisis, but they do hold large gold reserves just in case they are needed.

We will follow it here to see what actually happens.

No comments:

Post a Comment