Golden Rule: Whoever Has the Gold…

The Golden Rule: Whoever Has the Gold Makes the Rules

Bullion.Directory precious metals analysis 9 October, 2014
By Terry Kinder
Investor, Technical Analyst

Today, despite supposedly being worlds apart from the age of kings and serfs, those who desire to rule are still seeking gold. An especially interesting modern case of this golden rule of gold is that of China. Almost daily there are stories scattered across the gold and silver community about China. Whether it be the Shanghai Gold Exchange or talk of a gold-backed Yuan, the China gold stories keep coming at a furious pace.

Golden Rule vs King Dollar: China seeks to wrest control of the reserve currency from the United States, perhaps hoping to gain the benefit of that “exorbitant privilege” for itself.

The deeper undercurrent of the China gold story is its struggle to break the hegemony on the US Dollar through its role as the world’s reserve currency.

Valéry Giscard d’Estaing, while French Minister of Finance, referred to the United States possessing the global reserve currency as an exorbitant privelege.

Wikipedia describe the exorbitant privilege as follows:

The term exorbitant privilege refers to the alleged benefit the United States has due to its own currency (i.e., the US dollar) being the international reserve currency. Accordingly, the US would not face a balance of payments crisis, because it purchased imports in its own currency.

There has been a good deal of fascination, even a bit of cheering, surrounding the possibility of China assuming the mantle of economic leadership. One common version of the story is that China achieves this golden rule by first purchasing massive quantities of gold.

Second, China works towards a series of bilateral agreements that replace trade in US Dollars with trade in the Yuan.

Third, China makes the Yuan fully convertible. Finally, China backs the Yuan with gold and wins global reserve currency status for the Yuan, leaving the United States in a substantially weaker economic and geopolitical position.

Will the golden rule of China be ushered in by a gold-backed Yuan? Should China achieve reserve currency status for the Yuan, what will China look like and how will it project its power around the world?

Certainly the ability of the US to print large quantities of dollars and use them to purchase good cheaply is highly advantageous. It allows the US to trade paper in the form of dollars backed by “the full faith and credit” of the US, and its ability to collect future tax revenues tomorrow, for the things its citizens and government want today.

The exorbitant privilege is said to allow the US to export its inflation to other countries. Additionally, the miracle of fractional reserve banking, combined with controlling the global reserve currency, allows the US to maintain and project military power across the world. This allows the United States to obtain its “national security objectives” globally without giving much consideration to how other nations might view the situation.

So, it is understandable that the possibility of a golden rule by China has captured the imagination of many. What is seldom discussed in analyzing the accumulation of gold by China is what will they do with this new-found power should they achieve it. Should the Chinese win the day and see their currency crowned King Yuan, what will China become?

What will a world with China as the preeminent economic power look like? What will China’s national objectives be? Will China seek military dominance and how will they project its power?

Conclusion:

We live in a world where the future is still evolving. Whether that future will be one of the golden rule of China or continued dominance by the US and King Dollar is still unknown. The dominance of the United States economically is being challenged by China. In fact, the IMF has reported that China has overtaken the US as the largest economy.

What is often overlooked in discussing the ongoing struggle for economic and global dominance is what will the rules be should China’s gambit to hold the gold result in it replacing the US as the most powerful nation on earth.

A word to the wise: Be careful what you wish for, you just might get it.

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