Why the U.S. is Letting China Accumulate Gold
Editor's Note: Jim Rickards has published a third book entitled "The Big Drop: How to Grow Your Wealth During the Coming Collapse." It's available exclusively for readers of his monthly investment letter called Strategic Intelligence. Before you read today's essay, please click here to see why it's the resource every investor should have if they're concerned about the future of the dollar.]
A lot of people think about gold as a percentage of a country's total reserves. They are surprised to learn that the United States has 70 percent of its reserves in gold. Meanwhile, China only has about 1 percent of its reserves in gold. People look at that and think that's an imbalance. But those are not very meaningful figures in my view.
The reason is that a country's reserves are a mixture of gold and hard currencies, and the currencies can be in bonds or other assets. The United States doesn't need other currencies. We print dollars, so why would we hold euros and yen?
The U.S. doesn't need them, so it makes sense that the country would have a very large percentage of its reserves in gold. China, on the other hand, has greater need for other currencies.
A better metric, in my opinion, is to look at a country's gold holdings as a percentage of GDP. GDP is a representation of how big a country's economy is. It's the gross value of all the goods and services.
There are different measures of money supply — M3, M2, M1, and M0. In a money economy, however, you can say that the country's gold holdings are the real money. I call a country's gold reserves gold "M-subzero".
The IMF officially demonetized gold in 1975. The U.S. ended the convertibility of gold in 1971. Gold disappeared "officially" in stages in the mid-1970s. But the physical gold never went away.
Today, the US has about 8,000 tons. We haven't sold a significant amount of gold since 1980. We dumped a lot of gold in the late 1970s to suppress the price, but none after that. So one of my questions for central bankers is, if gold is such a ridiculous thing to have, why are we hanging onto it? But that's a separate question.
Right now, China officially does not have enough gold to have a "seat at the table" with other world leaders. Think of global politics as a game of Texas Hold'em.
What do want in a poker game? You want a big pile of chips.
Gold serves as political chips on the world's financial stage. It doesn't mean that you automatically have a gold standard, but that the gold you have will give you a voice among major national players sitting at the table.
For example, Russia has one-eighth the gold of the United States. It sounds like they're a small gold power — but their economy's only one-eighth as big. So, they have about the right amount of gold for the size of their economy.
The U.S. gold reserve at the market rate is about 2.7 percent of GDP. That number varies because the price of gold varies — but it's around 2.7 percent. For Russia, it's about 2.7 percent. For Europe, it's even higher — over 4 percent.
In China, that number is 0.7 percent officially. Unofficially, if you give them credit for having, let's say, 4,000 tons, it raises them up to the US and Russian level, but they want to actually get higher than that because their economy is growing.
Here's the problem: If you took the lid off of gold, ended the price manipulation and let gold find its level, China would be left in the dust. It wouldn't have enough gold relative to the other countries, and because their economy's growing faster and because the price of gold would be skyrocketing, they could never acquire it fast enough. They could never catch up. All the other countries would be on the bus while the Chinese would be off.
When you have this reset, and when everyone sits down around the table, China's the second largest economy in the world. They have to be on the bus. That's why the global effort has been to keep the lid on the price of gold through manipulation. I tell people, if I were running the manipulation, I'd be embarrassed because it's so obvious at this point.
James G. Rickards is the editor of Strategic Inteliigence, the newest newsletter from Agora Financial. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. Jim also serves as Chief Economist for West Shore Group.
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