The value of Gold has been subject to intense debate for centuries. Nathan Mayer Rothschild was once the richest man in Britain and probably in the world. His company, NM Rothschild, was appointed as the bullion broker to the Bank of England in 1840 and went on to operate the Royal Mint Refinery in 1852. When asked what the value of the barbaric metal was worth, Nathan used to reply, "I only know of two men who really understand the true value of gold—an obscure clerk in the basement vault of the Banque de Paris and one of the directors of the Bank of England. Unfortunately, they disagree.”
N M Rothschild & Sons rose to prominence in areas that included lending, underwriting government bonds, discounting commercial bills, direct trading in commodities, foreign exchange trading and arbitrage, as dealing in gold bullion. It was the brilliance and cunning of Nathan who paved the way for the firm to become the first international banking cartel.
In 1870 the Rothschilds formed the world's second largest oil producer, the Caspian and Black Sea Petroleum Company. The Rothschilds financed DeBeers Diamonds, becoming the biggest shareholder, and financed the railroad system of Europe and the Suez Canal for Britain. By 1905, the Rothschild interest in copper miner Rio Tinto amounted to 30-percent.
It was of great interest to bullion traders when on April 15th 2004, with the price of gold trading at $402 /ounce, NM Rothschild & Sons, which had fixed the price of gold twice a day for 85-years, suddenly announced its withdrawal from the London Gold Pool. By withdrawing from the Gold Pool, NM Rothschild was no longer obligated to sell its gold to anyone, including central banks. Were the Rothschilds anticipating some new dynamics that would send the yellow metal soaring to new heights?
Since then, the yellow metal has tripled in value to around $1,250 /oz. Central bankers overseeing emerging economies have become net buyers of gold, and mergers and acquisitions in the gold mining industry have put more of the yellow metal’s supply into fewer hands. Also tilting the balance into gold’s favor is the biggest explosion of the global fiat money supply in history.
Central bankers have monetized trillions of dollars worth of government bonds and mortgage debt in Euros, British pounds, Japanese yen, and US-dollars. In response, investors from all corners of the globe, including central banks in China, India, Russia, and Saudi Arabia, have been accumulating vast quantities of gold as a hedge to protect their purchasing power of their national reserves or savings.
Historically, Gold has been renowned as a hedge against inflation by tracking the direction of key commodities such as grains, crude oil, and industrial metals, for early clues about the future direction of inflation. Gold is also touted as a "safe haven," from tensions between warring nations, or dangers lurking from a global banking crisis. In recent years the very same factors that have caused global stock markets to plunge have helped the price of gold to climb sharply higher. Today the widespread integration of the global economy has made it possible for banking and economic failures in Europe or the US to destabilize the entire world economy.
Seeking to counter the worst downturn in the global economy since the Great Depression years of the 1930’s, the "Group-of-20" finance ministers and central bankers initiated emergency support measures for their economies, which included issuing trillions in sovereign debt and printing trillions in paper currency. The IMF calculates debt in the Group of 20 economies will reach 118% of GDP in 2014, up from about 80% before the crisis, yet so far the massive issuance of G-20 debt has avoided the ire of bond investors and credit rating companies.
However, one of the key drivers that’s been propelling the gold market to record heights is the massive build-up of debt, issued by the world’s biggest debtor nations. The dynamic is based upon a simple equation. At the end of the day, more debt will equal more money printing by central banks. Japan for instance, is issuing a record 44-trillion yen ($473-billion) of bonds this fiscal year, as falling tax revenues and the rising costs of supporting an aging population widened Japan’s deficit. (sounds like North America ?)
When Far Eastern central bank buying of gold begins to outstrip Western central bank selling, the price of gold could soar to levels that most observers can scarcely imagine today. China has vaulted ahead of India to become the world’s biggest gold consumer, buying 461-tons last year spurred by ultra-low Chinese bank deposit rates of 2.25% that are yielding less than the rate of inflation. Turnover of spot gold traded on the Shanghai Gold Exchange increasing +22.6% last year, and totaled 1.1-trillion yuan (US$162-billion).
If Beijing is buying gold from its own miners, then it’s exporting less and keeps supplies off the world markets. The Chinese Politburo doesn’t need to disclose the size of its official gold reserves to the world until it deems the timing to be strategically advantageous. China is in a tenuous position since any announcement of even a small increase in its gold reserves could jettison the yellow metals' price sharply higher. Beijing can play this card if or when it wishes to.
Beijing hasn’t disclosed the size of the upcoming devaluation of the US dollar in order to dissuade currency speculators from jumping on the bandwagon. However, on June 23rd, angry US senators said they are not impressed by China's baby steps to partly free the yuan and vowed to push forward legislation to punish a Chinese currency misalignment of as much as 40% against the US dollar exchange rate, which the US senators say distorts trade and steals jobs.
The specter of a Chinese, US trade war is just one of several worries that is driving the Shanghai red-chip index sharply lower this year. The Shanghai Composite index has tumbled to 2,427, its lowest close in 14 months, and is on course for a 22% slide over the second quarter as the Euro zone debt crisis and a tighter Chinese monetary policy fueled a broad selloff. Property stocks have been very hard hit amid fears that China’s real estate market could soon begin to deflate, which in turn would badly hurt the earnings of China’s top banks.
On June 18th Xia Bin, one of three top advisers on the People’s Bank of China's (PBoC) monetary committee, said China must pursue policies to tighten liquidity this year to deflate asset bubbles. He urged the PBoC and bank regulators to stick to plans to reduce new bank lending and curb property speculation. PBoC deputy Su Ning signaled that the central bank is aiming to slow the growth of China’s M2 money supply to +17%, from a +21% clip in May, and is also targeting 7.5 trillion yuan in new loans for this year, or roughly half of last year’s supply of credit.
This means that China's economy, the world’s biggest buyer of base metals, would likely slow from a +11.9% annualized growth rate in the first quarter to around 8% growth by year’s end. The dollar's upcoming devaluation, and/or threat of tariffs in the United States, is also likely to take a bite out of Chinese exports. Thus, global stock market operators cannot expect China to continue as the world’s economic locomotive that would protect it from the specter of a "double dip" recession.
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