Why have Russia and China now been increasingly accumulating physical gold? China is just moving it materially to Hong Kong and Shanghai. They are not storing it in foreign Central Bank depositories as much anymore. Even Germany and other countries are now requesting to have their gold repatriated outside of U.S. Central Banks. China currently produces as well as imports more gold than any other country in the world. Not only is China deciding to buy record quantities of gold, but Russia is deciding to buy even more.
Our Federal Reserve is regularly printing money like it is going out of style. Nobody at the Fed or even in the U.S. Government incredibly seems to be all that bothered that all of this money printing could possibly be endangering the petrodollar. The rest of the world might begin rejecting the increasingly volatile U.S. dollar simply by moving from dollars to gold as payment for petroleum. Gold can be used as a currency in international trading.
Is The Petrodollar Dying?
Is China hoarding tremendous quantities of gold because they intend to ruin the petrodollar? Both Russia as well as China have mentioned the possibility of starting a new global reserve currency. Up to this point in time, simply no legitimate contenders have emerged to dethrone the U.S. dollar. The more gold a country possesses, the more sovereignty it will have in the event that there’s a cataclysm with the dollar. China is trying to position the yuan or renminbi as an alternative global reserve currency and significant gold reserves are essential if this is to work.
The U.S. dollar currently is the foremost global currency because of the petrodollar. Only the U.S. can print and regulate the value of petrodollars. Therefore, consequently, we actually control the flow of oil by how much money we print. Every nation that needs to purchase oil from an oil producing country is required to do so in U.S. dollars. The primary exception now to this policy is Iran. When Iraq attempted to substitute the euro for the dollar in paying for oil, Saddam Hussein was overthrown. A few other countries have hinted at their attraction for non-U.S. dollar oil trading including Russia, Venezuela, and Indonesia.
Each country on the globe that imports oil needs to have enormous quantities of dollars in reserve which can be invested in easily convertable U.S. Treasury bills and other interest bearing securities. It has established a huge demand for U.S. dollars and U.S. debt. This is really the only thing that has supported our trillions of dollars of debt.
The Currency War
The expression “currency war” is actually just competitive devaluation of currencies by printing more money. This devaluation is actually rare throughout nearly all of history simply because nations have typically preferred to sustain a higher value for their currency. However, as nations deserted the Gold Standard at the time of the Great Depression, they used currency devaluations to stimulate their economies. Considering that this essentially pushes up unemployment overseas, trading partners promptly retaliated with their own devaluations.
Nations around the world participating in this competitive devaluation since 2010 have employed a mixture of policy methods, like direct government intervention, the imposition of capital controls, and now, indirectly, quantitative easing. The consequence is that a country’s exports now become more inexpensive (to the buying countries) but then their imports become even more expensive. As a result, their country must work even more to buy less.
We are now in the midst of a “currency war” as central banks in countries all over the planet race to devalue their currencies. The U.S. is the most indebted society in the entire world. If you began paying back just the recent debt that the U.S. has amassed in the course of the Obama administration at the rate of 1 dollar per second, it would take more than 184,000 years to pay it off. The vast majority of economists agree that the U.S. will never be able to pay back these debts. The only way out appears to be for the U.S. to attempt to inflate the debt away by currency devaluation. This is exactly what continues to fuel the flames of the currency war.
Since 2008, the entire world has been in what in hindsight could become known as a period of currency wars. Over the last four years we have seen numerous highs and lows for the US Dollar Index. This is driven primarily not as much by any strength in the U.S. dollar per se but rather by the weakness in the other main foreign currencies such as the yen, the euro and the pound.
A Day of Reckoning is Coming
Europe will most likely be the epicenter of the approaching storm. Japan is waiting in the wings, as well as numerous other countries overseas. This is going to be a worldwide phenomenon. Not surprisingly, the U.S. will be in it, also. This country has been consuming more than we have been producing and living well above our means. This continues to be made possible by the U.S. federal government borrowing against projected future revenues and by making use of the savings of it’s citizens through methods like a lot more taxes.
The majority of American people clearly don’t understand that Russia and China have the power to collapse the U.S. economic system by moving to a gold for oil system. This is because a petrogold rather than a petrodollar system would mean that the U.S. could no longer have the capability to export our debt-based inflation to the rest of the world. Russia and China are stockpiling gold as rapidly as they are able to in anticipation of a approaching currency crisis as a result of the West’s increasingly suspect paper funds.
If China and Russia are able to get together with a bunch of oil producing nations in the Middle East and create a system in which oil is traded for gold, then the day of reckoning will come to the USA. First of all, the demand for U.S. government debt should plummit and interest rates on that debt and on other things in our economy would skyrocket. Economic activity may well then grind to a standstill and our financial markets would come apart.
UPDATE: (11/30/2013) China is Literally Buying Gold by the Ton.
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ROB – (admin)
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