With the precious metals surging and the dollar falling to start the new year, yes, China plans to send gold prices dramatically higher.
January 2 (King World News) – Dr. Stephen Leeb: “China has a different look as we kickoff 2018. It has shed some of its former caution and adopted a more forthright tone. If you don’t pay close attention, it would be easy to overlook the shift. But it is significant – and it tells me gold is closer to taking off…
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That’s because the shift in tone suggests China sees no impediments to going all out for strong growth in 2018 and beyond. Chinese officials are now indicating, and for very valid reason, that they are much less worried about debt, at least not the putative corporate debt that supposedly was a drag on the economy.
This gives them enormous latitude to invest freely in projects – including massive infrastructure creation – to address rural poverty and raise incomes, which will be their main focus. They can throw off the wraps that to some extent have held them back. The ensuing rapid growth will push commodity prices higher, with gold leading the pack.
China’s Deception & Their Push To A Reserve Currency Centered On Gold
At the same time, China sees more urgency in not remaining tethered to the dollar as the backbone of international trade. I’ve talked a lot about the Eastern oil benchmark China is readying, and how it will lead to a new reserve currency centered on gold. That’s getting closer, too, and it will be an additional propulsive force for pushing gold higher.
What are some of the tealeaves I’ve been reading? For one, last weekend, China made an unusual statement. It acknowledged that debt growth had declined dramatically in the first three quarters of 2017. The admission came from Xu Zhong, head of research at the PBOC, China’s central bank.
I refer to it as an “admission” because in my view in the past, even the immediate past, China has taken an opposite tack – deliberately overstating concerns about debt as a way of getting the West off its back. With the Western financial press hyping the idea that China’s economy was vulnerable, China gained time and breathing room to proceed with its carefully crafted plans to become an ever more imposing presence in the global economy. This is a ploy right out of the 2,500-year-old playbook The Art of War, which I’ve referred to often before. (If you’re writing about China, it’s hard to avoid.) As quoted by Deng Xiaoping, the leader who most set the stage for the explosive growth of modern China, the seminal words are: “Hide your brightness, bide your time.”
The Financial Times in an article on Dec. 13, 2013, astutely echoed this precept, writing that China would “keep its capabilities secret until the moment was right to reveal them. Until then, the priority was to raise incomes and integrate the country in the global economic system.” I think China has come to realize the time is right to reveal those capabilities. China’s very recent willingness to acknowledge debt isn’t the albatross it has been perceived as being is grounded in reality. Xu’s comments are right in line with the Bloomberg study of Chinese corporate debt I discussed on KWN a couple of weeks ago. It, too, concluded that Chinese companies had made extraordinary progress in reducing debt. In fact, China’s corporate debt is much more manageable than U.S. corporate debt.
China, though, hasn’t completely lost its habit of downplaying its position. Even while admitting the sharp decline in leverage in 2017, it has continued to say it has debt problems. But rather than corporate debt, it now points to local government debt. I’d take this with a big grain of salt. I don’t doubt that many localities, especially ones away from the prosperous East, have problems. But let’s get real. When you add up all government debt in China – central and local – you come up with a figure of about 37 percent of GNP. In the U.S., the comparable number is about 100 percent and rising.
China’s path to untrammeled growth is wide open. And it goes hand in hand with other factors ensuring strong global growth in 2018. One is the Belt and Road initiative, which encompasses over 60 countries and the majority of the world’s population. Beyond boosting China’s growth through burgeoning trade, it will propel growth in participating countries, too. For example, Pakistan – currently a troubled country hoping to avoid a disastrous slowdown – could find itself growing by 6 percent or more before the decade’s end.
China’s oil imports are further evidence of the strength of its economy. In November they rose to the second-highest monthly level in history. Also, oil inventories (as distinct from stockpiles) are at the lowest level since 2010, when records became available. Oil, which is by far the most important commodity, is a strong proxy for overall growth. Growth in the East and developing world will be enough to drive most commodities much higher. And if history is any guide, gold, a monetary metal, will have to lead the pack.
The Minsky Moment
Gold, as I noted at the top, will be further fueled as China pursues plans for a new monetary system. Remember when in October PBOC chairman Zhou Xiaochuan said China had to be wary about the possibility of a “Minsky moment”? A Minsky moment is when debt-fueled speculation leaves major assets at unsustainable valuations – a bubble whose unwinding can threaten the fabric of society. Zhou wasn’t talking about China. He was talking about the U.S., whose unraveling in 2008 wreaked such havoc. The Chinese believe a world remaining under the U.S. aegis is dangerous for them and for everyone else.
As we’ve discussed before, China’s plan to upend the current system starts with the launch of a new Eastern oil benchmark that ultimately will be traded in a basket of currencies that includes gold. You may have seen an article on December 26 in the Wall Street Journal headlined: “China’s Bid to Dominate Oil Pricing Will Fail.” It was subheaded: “Sorry, China’s oil market is very different from the one for iron ore.” I hope you didn’t take it to heart as meaning China will be stymied in creating a new reserve currency. It won’t be.
The article’s author, Nathaniel Taplin, doesn’t dispute that China will start trading oil in yuan, which is what we’ve always said would be the initial step. But he argues the benchmark won’t get far, mainly because of controls that still exist on the yuan. And he compares China’s position in the oil market with its position in iron ore, where it is clearly the dominant world user. Trading of iron ore in China is now conducted in yuan.
But Taplin overlooks several things. While China isn’t the biggest user of oil, it is by far the largest oil importer. And he also overlooks that oil use in the East overall will come to dominate global usage. Most important, he doesn’t consider that gold will be brought in, offsetting any perceived volatility in the yuan. Not to mention that volatility in the yuan will be lessened once it’s part of an overall basket that is linked to both gold and a blockchain. Saudi Arabia and China already are conducting some trade using blockchain technology, in which China is almost assuredly and by a wide margin the world expert.
China To Push Gold To Untold Heights
In other words, yes, Taplin is right that an Eastern oil benchmark backed solely by the yuan might not make it. But an Eastern oil benchmark backed by a basket of currencies that includes both the yuan and gold is a different matter entirely. Such a basket is what China has had in mind all along, and there’s every reason to believe it will come into being, will succeed, and will help push gold to untold heights.”
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