Completing the Circle

I made the prediction back in July that gold prices would start rising due to continued gold accumulation by Russia and China. However, the price of gold has stayed flat. Nothing much is happening. The price of gold bounces about inside a wedge formation that has been in place for more than a year. It appears that the suppression of the gold price through paper derivatives is still taking place, actively aided by gold importers such as Russia and China.

I'm not alone in this verdict. GoldBroker is of the same opinion, and they lay their case out excellently in this article. Putin's obsession with gold is not a mere fancy. It's rooted in a desire to get back onto a gold standard for international trade. However, instead of petitioning world leaders for this, Putin has gone ahead and done it without asking anybody for permission.

The scheme is simple, and based on sound economics.

Putin's primary concern is that of Russia's sovereignty, which depends on two factors:

1. A strong military
2. No trade deficits

This makes it impossible to attack Russia either through military intervention or through trade embargos. But these two factors are not in themselves sufficient to guarantee success. Russia depends on trade for its economic prosperity, and must therefore keep running accounts of imports and exports.

This is the domain of money. Without access to money and associated transaction mechanisms, trade becomes impossible. Hence, Russia is dependent on the world's reserve currency in order to prosper, and that reserve currency is the US dollar. But why should this be so? Why use the US dollar in trade with other countries than the US?

The answer to this is that it doesn't have to be so at all. Any currency will do for trade, provided there's a simple way to convert the currency in question into some tangible asset that everybody can agree on, so that trade imbalances can be settled and straightened out before they becomes unbearably large.

This is the significance of China's gold exchanges. China's currency can be used to buy gold. If China imports more from Russia than Russia imports from China, the difference can be settled in gold. The same goes for any other country with a gold exchange, and Russia is now using these mechanisms to settle trade imbalances.

This is the reason Russia and China are actively suppressing the price of gold. They want as much of it as possible when they settle trade surpluses in gold rather than dollars or euros.

With Russia and China now on a de facto gold standard, other countries are likely to follow suite. Trade surpluses will increasingly be settled in gold, and surplus nations will naturally try to get as much gold as they can before deficit nations run out of the stuff.

The irony in this is that the mechanisms for suppression of the gold price trough derivatives was invented by the deficit nations of the west in order to strengthen the US dollar. That mechanism has now been hijacked by the nations running surpluses, and the west is running out of time. If nothing is done to stop physical gold from moving east, there will come a day when there's no gold left.

When that happens, there will be no reason for surplus nations to trade with deficit nations. The value of their currencies will drop off a cliff, and the whole system will have to be reset. Every currency will have to be tied to gold at a rate that will guarantee a balance of trade. Only nations with gold reserves will be allowed to run trade deficits, and every one of these nations are currently running surpluses.

Deficit nations will have to produce stuff that surplus nations are willing to buy. In the absence of this, deficit nations will have to hand over assets of all kinds. The tables will be turned, and the people of the west will once again have to produce before they can consume.

Vladimir Putin

By Kremlin.ru, CC BY 4.0, Link