The world is preparing to abandon the U.S. dollar and the UK pound. Pronouncements from Hong Kong, the United Arab Emirates, Switzerland and Germany have made clear that the Anglo-Saxon financial system’s doom is only a matter of time.
A huge announcement out of Hong Kong rattled the financial world on September 3. Although big media relegated the story to the back pages, it should have been front and center! What’s the news? China is demanding its gold back.
“Hong Kong is pulling all its physical gold holdings from depositories in London,” reported MarketWatch (emphasis mine throughout).
The announcement, coming in the midst of the global economic crisis, is sending a clear signal: Britain is in far worse economic shape than generally realized, and China thinks it needs to get its gold out while it can—before something happens to it. Gold closed at a new record high of $1,006 per ounce on Friday.
Governments have a notorious history of confiscating precious metal reserves during times of crisis—even in America. In 1933, in order to stabilize the monetary system, President Franklin D. Roosevelt issued an executive order confiscating all privately owned gold in the United States. Later, in 1968, President Johnson issued a proclamation that all Federal Reserve Silver Certificates were merely fiat legal tender and could not be redeemed in silver. Then in 1971, the U.S. government closed the gold window completely and declared that foreign nations would no longer be allowed to exchange U.S. dollars for the gold that was supposedly backing them.
But China’s decision to demand its gold back is more than just a vote of no-confidence against the pound. It is a direct challenge to the whole global Anglo-Saxon-dominated financial system.
China wants its own gold bullion money center. Toward this end, it also announced that it has created bullion storage facilities in Hong Kong to compete with London and New York. Chinese officials said they will soon launch a marketing drive to convince Asian central banks to transfer their gold reserves from overseas money centers to a storage complex closer to home in Hong Kong.
In today’s world of fiat paper currencies, many have forgotten the golden rule: He who has the gold rules. Beijing hasn’t forgotten—it has just been playing along.
The Chinese administration is not against fiat currencies in principle. It too relishes the ability to print fiat money. It loves the power it gives it to essentially confiscate the wealth of the country’s tax base. However, China also knows that the United States and Britain can print money too.
America and Britain owe China and other countries trillions of dollars. As long as Washington and London did not overtly abuse the ability to create money, Beijing was happy to keep lending. But with the global financial situation still teetering on the precipice, both Britain and the U.S. have publicly admitted to “quantitative easing” (the technical term for creating new money out of thin air) to intervene in the bond market and pay back borrowed money. The dollar is at risk of a major devaluation—and China knows it.
Once countries start down the funny-money road, confidence deteriorates rapidly. How valuable is that $100 bill when the government is creating hundreds of billions to give to big banks? It is often a short trip to the paper currency recycle bin. At that point, you have a free-for-all. Once it gets ugly, nations will go to extremes to avert economic collapse.
Thus, China wants its gold. As much as possible, as soon as possible, before the world’s monetary system falls apart.
On September 6, Ambrose Evans-Pritchard reported in the Telegraph his conversations with Cheng Siwei, former vice chairman of the Chinese Communist Party Standing Committee. According to Evans-Pritchard, Cheng, who now acts as sort of an unofficial economic ambassador to the world, says that China is alarmed by U.S. money printing.
Cheng stated on the record that China has lost confidence in the U.S. dollar and is moving toward a partial gold standard through reserve accumulation. “The U.S. spends tomorrow’s money today,” he said. “We Chinese spend today’s money tomorrow. That’s why we have this financial crisis.”
“If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in U.S. bonds, and this is very difficult to change, so we will diversify,” he said. “Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets.”
But China doesn’t seem too overly concerned about the price—it just wants the gold. The Chinese government has even unleashed an advertising campaign through its state-run media to encourage people to purchase gold and silver as a way to invest and protect their wealth. The theme seems to be: Get as much gold into the country as possible before the crash comes.
Other nations are grabbing their gold and heading for the exits too. A few months ago, the United Arab Emirates announced that it had begun constructing a major gold storage facility that would be marketed to members of the Gulf Cooperation Council. The uae said it had requested its gold currently stored by the London Bullion Market Association to be sent home.
Bob Chapman’s International Forecaster reports that Germany stores significant portions of its gold with the U.S. government. He says that Germany has asked that its gold stored in the U.S. be transferred back home. Economic analyst Jim Willie also mentions unconfirmed reports that Germany has requested that its gold be sent back.
Even Switzerland has threatened to remove its gold from custodial accounts in the U.S. Reuters reported in February that the populist Swiss National Party (Switzerland’s largest political party) said that if Washington decided to go ahead and force Swiss Banking Giant ubs to divulge names of its banking clients that Switzerland should, among other things, pull all of its national gold reserves from America. America has since pressed ahead with its case. In August, ubs said it would release approximately 10,000 client names.
Everywhere you look, big events are occurring in the global economy. Last week, the United Nations said that the dollar’s unique role as a global currency was at an end. Although China, Brazil, Russia and India have all called for a new economic system not based on the dollar, this is the first time that a multinational institution has suggested scrapping the greenback. Also last week, the U.S. administration was forced to ask Congress to raise the debt ceiling again—this time to over $12 trillion—a level that will be breached by October. On Friday, three more banks failed in the U.S., bringing the total to 92 this year. The Federal Deposit Insurance Corp. recently increased the number of problem banks on its watch list to 400—up from around 300 during the first quarter of the year. In Britain, last week, the World Economic Forum listed Britain’s economy as less stable than Peru’s.
The world is awaking to the possibility that America and Britain face real collapse. The part that stings the worst is that one can’t blame them for getting their gold while they can. They are right: The facts indicate America’s and Britain’s economies are going down. It is just a question of time.