-- Published: Sunday, 16 November 2014 | Print | Disqus
By Richard (Rick) Mills
Ahead of the Herd
As a general rule, the most successful man in life is the man who has the best information
Zheng Bijian, a leading Chinese intellectual and reformer said: “The most important strategic choice the Chinese made was to embrace globalization.”
China has made a new most important strategic choice – Asian Regionalization.
“In the past few years, both Chinese and foreign analysts began to reach the conclusion that China has developed a fairly consistent and coherent grand strategy… Because economic development is taken as the only way for tackling all the pressing challenges that China is facing and will face, China’s grand strategy must serve the central purpose of development. Therefore, the central objective of China’s Grand Strategy in the past two decades (which may well last to 2050) can be captured in just one sentence: to secure and shape a conducive environment (security, economic, and political) so that China can concentrate on its development (economic, social, and political).” Tang Shiping and Zhang Yunling, China’s Regional Strategy
Today, trade with the United States, the European Union and the rest of the West is not the priority it use to be for China. Today the SCO (aka the Asian NATO), chaired by Russia and driven by China, has been ramping up its attention towards expansion and economic cooperation among its members.
That little nugget of information is going to have huge consequences for gold’s price. Let me explain.
Shanghai Cooperation Organization
Originally founded as the ‘Shanghai Five’ in 1996 it was reformed as the Shanghai Cooperation Organization (SCO) with the addition of Uzbekistan in 2001. The SCO is now an economic and security cooperation group consisting of six Central Asian countries: China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan and Uzbekistan.
Afghanistan, India, Iran, Mongolia and Pakistan are observers while Belarus, Turkey and Sri Lanka are dialogue partners. India, Pakistan, and Iran will become new members in 2015.
At the end of 2013, the bloc had a combined economic output of over 11 trillion U.S. dollars - representing 14.9 percent of the global total.
The SCO seems to be completely off gold investor’s radar screens. It definitely shouldn’t be because China (and Russia’s) goal is to ‘create an Asian security architecture independent of the United States and its allies.’
But the SCO, as China envisions it is so much more than just security - China is going to mould Genghis Khan’s old stomping ground into a new economic bloc. A single cohesive market with a shared security blanket that will eventually encompass over four billion people.
The infrastructure and economic corridors have already been planned for and in many cases have been successfully implemented and built…
“Last year, China devised a ‘New Silk Roads’ policy to enhance connectivity with neighbouring countries. This policy has two components: a ‘Silk Road Economic Belt’ for land connectivity initially with Central Asia and a ‘21st century Maritime Silk Road’ to connect China with ASEAN and, ultimately, with the coastal cities of South Asia as well.
China’s actions have led to the revival of the Northern Silk Road. Cities in inner provinces such as Kunming, Chongqing, Chengdu, Xi’an and Xining have emerged as major metropolitan cities with urban infrastructure projects paralleling those in coastal areas. China has built an east–west railway line to connect far-flung cities like Urumqi and Kashgar to Xi’an and the coastal cities. This railway line has been extended to Moscow, using Central Asia as an economic corridor, and then on to Duisburg (in Germany) to become the China–Europe railway line. East–west pipelines such as the Kazakhstan–China and Central Asia–China pipelines have also been built.
In conjunction with India, which is actively implementing its ‘Look East’ policy, China is building the BCIM Economic Corridor to connect the Yunnan province of China with Myanmar, Bangladesh and India. This is an important segment of the less well-known Southern Silk Road.
In June this year, the Chinese Ambassador to New Delhi, Wei Wei, proposed the establishment of a ‘Trans-Himalaya Economic Growth Region (THEGR)’ to promote the interconnection and joint prosperity of China and India and neighbouring countries. As with many such proposals from China, details are not known as yet. Nonetheless, the proposal is welcome as it addresses an important missing link in connectivity in the region.” eastasiaforum.org
Silk Road Economic Belt, Maritime Silk Road
In May of 2014 China’s state-owned Xinhua News Agency unveiled an ongoing feature entitled “New Silk Road, New Dreams.”
“According to the map, the land-based “New Silk Road” will begin in Xi’an in central China before stretching west through Lanzhou (Gansu province), Urumqi (Xinjiang), and Khorgas (Xinjiang), which is near the border with Kazakhstan. The Silk Road then runs southwest from Central Asia to northern Iran before swinging west through Iraq, Syria, and Turkey. From Istanbul, the Silk Road crosses the Bosporus Strait and heads northwest through Europe, including Bulgaria, Romania, the Czech Republic, and Germany. Reaching Duisburg in Germany, it swings north to Rotterdam in the Netherlands. From Rotterdam, the path runs south to Venice, Italy — where it meets up with the equally ambitious Maritime Silk Road.
The Maritime Silk Road will begin in Quanzhou in Fujian province, and also hit Guangzhou (Guangdong pronvince), Beihai (Guangxi), and Haikou (Hainan) before heading south to the Malacca Strait. From Kuala Lumpur, the Maritime Silk Road heads to Kolkata, India then crosses the rest of the Indian Ocean to Nairobi, Kenya (the Xinhua map does not include a stop in Sri Lanka, despite indications in February that the island country would be a part of the Maritime Silk Road). From Nairobi, the Maritime Silk Road goes north around the Horn of Africa and moves through the Red Sea into the Mediterranean, with a stop in Athens before meeting the land-based Silk Road in Venice.
The maps of the two Silk Roads drive home the enormous scale of the project: the Silk Road and Maritime Silk Road combined will create a massive loop linking three continents. If any single image conveys China’s ambitions to reclaim its place as the “Middle Kingdom,” linked to the world by trade and cultural exchanges, the Xinhua map is it. Even the name of the project, the Silk Road, is inextricably linked to China’s past as a source of goods and information for the rest of the world.
China’s economic vision is no less expansive than the geographic vision. According to the Xinhua article, the Silk Road will bring “new opportunities and a new future to China and every country along the road that is seeking to develop.” The article envisions an “economic cooperation area” that stretches from the Western Pacific to the Baltic Sea.” Shannon Tiezzi, China’s ‘New Silk Road’ Vision Revealed, The Diplomat
Asian Infrastructure Investment Bank
China and 20 other Asian countries have signed a memorandum of understanding (MOU) to establish a new multilateral development bank, the Asian Infrastructure Investment Bank (AIIB). The AIIB was proposed by China and is considered to be a serious challenge to the World Bank and the Asian Development Bank (ADB),
China, who will be the largest shareholder with a stake of up to 50%, will also provide the AIIB’s first president - the bank’s headquarters will be in Beijing.
The AIIB will serve China well by:
- Helping China invest a large part of its foreign exchange reserves (US$3.9 trillion) on commercial terms.
- Playing a vital role in the internationalization of the yuan.
There are many Asian countries that have a significant and unmet need for infrastructure investment to lay the foundation for long-term economic growth. The AIIB acts as a complement to China’s already existing and rapidly increasing bilateral development financing.
The 21 member countries of the new Asian Infrastructure Investment Bank are: Bangladesh, Brunei, Cambodia, China, India, Kazakhstan, Kuwait, Laos, Malaysia, Mongolia, Myanmar, Nepal, Oman, Pakistan, the Philippines, Qatar, Singapore, Sri Lanka, Thailand, Uzbekistan and Vietnam.
By fostering growth and encouraging cooperation between OSC members, and future members, by establishing a development/infrastructure orientated bank and by developing its Silk Road Economic Belt as well as the Maritime Silk Road with other Asian states, China will place itself in a much stronger position (as the Asian heavyweight) to lead in the ‘Asian century.’
Internationalization of the Chinese currency
“Since the late-2000s, the People's Republic of China (PBC) has sought to internationalize its official currency, the Renminbi (RMB). The RMB Internationalization accelerated in 2009 when China established dim sum bond market and expanded Cross-Border Trade RMB Settlement Pilot Project, which helps establish pools of offshore RMB liquidity. By 2013, the RMB is the 8th most traded currency in the world. As of May 2014[update], 1.47% of world payments was settled in RMB, which ranked RMB as the 7th most traded currency in the world.” Wikipedia
From The Diplomat we get the following…
“…China’s global integration is no longer limited to trade, but is fast spilling over into the realm of finance.
The establishment of the Shanghai FTZ is expected to provide a boost to the city’s ambitions of becoming a full-fledged international financial center by 2020. While the FTZ was formally approved in August this year, the draft plans pointing towards full convertibility of the RMB within Shanghai were revealed more recently. This comes on top of other plans to liberalize trade, interest rates and the establishment of foreign and joint venture banks in the Shanghai FTZ. Already, foreign banks such as HSBC, Standard Chartered and Citibank have expressed interest in setting up branches in the Shanghai FTZ.
Importantly, the success of allowing RMB convertibility within the Shanghai FTZ will enable the Chinese government to gradually liberalize the RMB at the national level. This is in line with its plans to make the RMB a global reserve currency, with Shanghai potentially becoming a major center for RMB trade. However, plans to liberalize currency controls within the Shanghai FTZ are merely part of an overarching RMB strategy.
As early as 2004, China had tapped Hong Kong to become an offshore RMB center, designating the Bank of China Hong Kong as an RMB clearing bank. This was followed by announcements in 2009 that London would follow suit. By mid-2012, both Hong Kong and London had become offshore RMB centers catering to a variety of institutions and enterprises. Singapore was next in 2013, with the Industrial and Commercial Bank of China designated as the RMB clearing bank in the city-state. Plans to liberalize currency controls within the FTZ suggest that Shanghai will become the fourth city to facilitate the RMB’s internationalization, albeit as an onshore center.
Through the establishment of the three offshore RMB centers and full RMB convertibility in Shanghai, China can now encourage RMB use in several key markets. First, London provides an important bridge to European markets. Similarly, Singapore connects the emerging Southeast Asian economies to RMB funds and trade settlements. Given Hong Kong’s highly internationalized financial sector, it plays a particularly important role in connecting China to the rest of the world. This is a role that will be shared by Shanghai, with its pending emergence as an international financial center. As such, these four cities represent nodes through which China can expand its participation in global financial markets and encourage RMB trade and use.”
The first ever Renminbi sovereign bond will be issued by the UK Treasury.
The International Monetary Fund (IMF) is going to review the composition of its Special Drawing Right (SDR) monetary unit. It’s very possible that since the Chinese currency has met a sufficient number of standards for convertibility it will be become one of the constituent parts of the SDR, joining the dollar, the euro, yen and sterling.
In 2013 China was officially crowned the world’s largest gold market
accounting for around a third of global gold demand. Consumer demand soared 32 percent to 1,066 tonnes (up 160% from five years ago) of gold in the form of bars, coins and jewelry topping India’s 2010 record of 1,007 tonnes.
Note - India has once again overtaken China as the world's biggest gold consumer, buying 225.1 tonnes of gold jewellery, coins and bars Q3 2014, compared to 182.7 tonnes in China.
China is the world’s top producer of gold, mining 437 tonnes in 2013, with the largest annual increase globally for 2013. Gold production in China, over the last decade, has more than doubled as the country produced 6,827,000 ounces of gold in 2004. In 2014, gold production estimates are expected to be around 14.5 million ounces. The Chinese keep all of the gold they mine and the export of gold bullion is banned.
SGE & CGSE
The Shanghai Gold Exchange (SGE) was launched in September 2014 inside the city’s free-trade zone. The Chinese government backed SGE offers yuan-denominated contracts backed by gold held in Shanghai. The SGE currently has a network of 58 certified vaults, 55 of which are for storing gold and three that store silver.
The Shanghai Gold Exchange launched its International Board gold trading platform Sept. 29, 2014.
Forty members, including global banks UBS, Goldman Sachs, HSBC and Standard Chartered, will participate in trading eleven yuan denominated physical gold contracts including: 12.5 kg (400 oz) bar, 1 kg bar and a 100 gram contract.
The Chinese Gold and Silver Society (CGSE) has received permission from the Chinese government to build a new precious metals vault in Qianhai. The CGSE is the first non-mainland entity to be given such permission. The CGSE’s vaulting facility will have a 1,500 tonne capacity and will be completed by late 2016 or early 2017.
“Singapore continues its push to be a global gold hub. Further details emerged on the weekend about the planned launch by Singapore of a new 1kg physically deliverable gold contract for the Asian wholesale gold market.
This new gold contract differs from others in that as well as acting as a price discovery benchmark for 1kg gold bars in the Asian region, it has been specifically designed to actually deliver gold to wholesalers, because settlement of the contract is in gold 1kg bars and not in cash. A 1kg gold bar is 32.15 troy ounces.
The Singapore contract will be in lots of 25 kgs, denominated in US dollars, and it will trade for three hours in the Singapore morning time. Singapore is 7 hours ahead of London and 12 hours ahead of New York, and 2.5 hours ahead of the Indian market, but is in the same time zone as both Hong Kong and Shanghai.The US based CME Group who run the Comex gold futures exchange in New York and also host the new LBMA Silver Price auction in London have also announced plans for a new 1kg gold product in Hong Kong.
The CME’s new Hong Kong 1kg product is a US dollar denominated gold futures contract. It will trade on the Comex in New York and not in Hong Kong, but it will be settled and deliverable in Hong Kong at exchange-approved vaults. This is significantly different to the SGX physically deliverable 1kg gold contract in Singapore.” Sprott Money
The following graph show where Switzerland’s (Switzerland is a global hub for gold refining, with more than two-thirds of global gold transiting through the country) gold comes from and where it goes.
A great percentage of the West’s gold has hemorrhaged East and continues to do so. The top five countries getting mostly U.S & UK gold out of Switzerland are Hong Kong, China, India, Singapore and Saudi-Arabia. Asia accounted for 63 percent of total consumption of gold jewelry, bars and coins last year, up from 57 percent in 2010.
China is also importing massive volumes of gold from Hong Kong.
Per capita gold holdings in China are five grams compared to a developed nation 20 gram average.
China’s commercial, economic and financial focus is now centered on Asia.
“Beijing has learned to incorporate regionalization as an effective approach and embrace regional institutions as important platforms to advance China’s economic, political and strategic interests. Regionalization now plays an increasingly significant role in China’s overall foreign policy strategy that aims to maintain a peaceful and stable environment for its long=term economic development.” Dr. Emilian, China and the Global Politics of Regionalization
A regional currency is needed, in Asia gold is synonymous with money so China makes all the moves necessary to dominate the global gold market.
The internationalization of the Chinese currency means acceptance on a global scale.
FACT - The importance of gold as an investment, and as a backing to its currency, is being signaled by the Chinese authorities.
FACT - When China succeeds in establishing a Chinese Asian gold standard, it will propel gold prices to new heights.
China and the SCO, while rejecting western dominated financial institutions and a U.S. inspired status quo, are increasingly embracing a regional coordination of Asian economic and security concerns. An Asian gold standard should be on all precious metal investors radar screens. It’s on my screen, is it on yours?
If not, maybe it should be.
Richard (Rick) Mills
Richard lives with his family on a 160 acre ranch in northern British Columbia. He invests in the resource and biotechnology/pharmaceutical sectors and is the owner of Aheadoftheherd.com. His articles have been published on over 400 websites, including:
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This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.
Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified.
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Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.
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-- Published: Sunday, 16 November 2014 | E-Mail | Print | Source: GoldSeek.com