The currency debate is just another element in the rapidly changing global economic power battle, but of all commodities gold is likely to be the most consistent beneficiary.
By: Lawrence Williams – Tuesday , 18 Jan 2011 – LONDON
‘White man speak with forked tongue.’ Perhaps the old fictional statement attributed to Native Americans regarding the mainly White interlopers in the old cowboy movies could be applied by the Chinese to Timothy Geithner. The latter has been vociferous in his views that the Chinese should allow the renminbi to rise against the dollar, and there are many in the U.S. Congress who would agree. But at the same time the U.S. Fed’s Quantitative Easing money printing program has also been instrumental in weakening the dollar in any case and in exporting inflation to the globe’s emerging economies.
The Chinese, of course, have different priorities than the Americans. The government there is worried about the effect a stronger renminbi would have on the country’s exports and a potential loss of jobs as a result – and job losses in a country with 1.3 billion people they see as a recipe for increased domestic dissension which could ultimately become harder and harder to control – perhaps an overriding issue.
China has seen a decade of enormous growth built on its export sector as well as on internal urban development and population relocation. Much of this has been due to the migration of manufacturing away from the West as the capitalist system moves product manufacture to the areas where it costs least in its unending drive to maximize profitability in shareholder-driven companies. Once it was Japan which was the recipient of this largesse by the self-interest of the Americans and Europeans, but then the Japanese were coerced by the West into allowing the yen to rise, and continue to rise, which has had a hugely debilitating effect on the Japanese economy over the past 20 years. The Chinese do not want this to happen there. To put things in perspective, according to Bloomberg deflation in Japan has seen salaries fall to the lowest levels since 1990, bond yields are the world’s lowest, and the stock market is around 40 percent below its December 1989 peak. Output and exports have suffered, although for the local consumer prices have also fallen, but perhaps not as fast or as far.
To an extent the migration eastwards of manufacturing is mirrored in the resource sector as smelting and refining of metals and steel manufacture has inexorably moved to first Japan, and now to China, Taiwan and Korea in particular, and the Chinese low wage economy has also undercut the West in the mining of high-tech metals and minerals – rare earths are a prime example of this. This creates shortages in global supply as the Chinese see the need to restrict exports to make sure their own still-rapidly-growing industrial base needs to secure its own supplies into the future.
The currency impasse is an area of significant difference between the U.S viewpoint and the Chinese one – and also has a potentially important impact on the global commodities sector. Should the Chinese bow to U.S. pressure – although there seems little sign that this is likely to occur at least to the extent for which the U.S. seems to be pushing – then if Chinese exports suffer as a consequence due to higher prices, raw commodities demand will likely suffer also, with a debilitating effect on demand for industrial metals – although maybe not for gold, and maybe not for too long either as long as internal growth can be maintained.
However, the Chinese do perhaps hold the whip hand anyway. With round about $2-3 trillion in U.S. funds in its reserves it can effectively plow its own furrow. At the moment it does not see using this to decimate the dollar as financially advantageous which is why it appears, for now, to be surreptitiously building its physical gold reserves, funding state-owned corporations to buy up resources and property around the globe (including a major investment in gold ETFs), negotiating dollar-free trade deals with some partners, etc. Even if it is not already so in the eyes of many nations, it is rapidly usurping America’s position as the world’s dominant economic power, and is beginning to develop ultra high-tech weaponry for its military to rival, or possibly exceed that, of the U.S. In China things can, and do, move far more rapidly than in the West – ask anyone who goes out for competitive quotations from Chinese and Western companies on manufactured items. Often they will tell you the Chinese will provide samples of what they are requesting to their full specifications before they’ve even had an initial response from the Western company!
What does this mean for gold in particular? The currency wars will keep gold prominent while the battles continue, but longer term the growth in the expanding economies of the East in particular will create huge demand for all commodities, while gold will continue as a more stable store of wealth in what are already hugely gold-oriented communities, even as the Western economies continue to stagnate.
The Chinese view gold as an asset class which is far more reliable than say the dollar, the euro, or any other paper currency including its own. Its central bank, and its people, will continue to accumulate gold – the latter in ever growing amounts as wealth spreads down through the country’s population. Some estimates forecast that 85% of the Chinese population will be in the ‘middle class’ or higher sector by 2025 – which is over a billion people – around 3x that of the whole of the USA. What this will do for global consumption – and particularly that of gold (and other commodities) – is almost impossible to fully comprehend.
Add India into the mix. By 2025 its population may well exceed that of China and while overall growth may be slower it will still encompass enormous numbers of people with ever growing purchasing power.
Thus unless anything cataclysmic happens in the meantime to interrupt all this (and it could in terms of natural disasters or wars as the old world battles the new for dominance), the bull market in gold and industrial and agricultural commodities is likely to be with us for years to come, despite what the economists may say about the length of cycles. But gold is likely to be the most consistent riser, if not the largest overall over the period. Western economies may be in decline – and that decline could also continue even as the emerging world begins to dominate. Under this scenario holding gold could be the one sure way of protecting wealth short, medium and long term. As we note, other commodities may offer better returns at some stages in the cycle, but are also more prone to substitution or technology advances which make their main uses redundant. There’s no substitute for gold in its true monetary connotation.
