China, Gold, and the "Boom of the Century"

"China's foreign exchange reserves have not increased for almost two years...."

The Califia Beach Pundit provides an extraordinarily canny assessment of Chinese monetary policy, its dollar peg, foreign exchange accumulation, and gold's commodity price:

China's decision in early 1994 to peg the yuan to the dollar was a key factor driving China's growth, since it brought Chinese inflation rapidly down to the level of the U.S. The prospect of a stable currency not only reduced inflation and its multiple distortions, it also increased the market's confidence in China, and helped boost investment in the country since it all but eliminated foreign exchange risk. Indeed, since the yuan has only appreciated against the dollar since 1994, foreign investors benefited from strong Chinese growth and yuan gains. China was the boom of the century.

Pandawiki

Image courtesy of Pandawiki.net

 

Massive inflows of foreign capital seeking to benefit from rapid Chinese development essentially forced the BoC to buy over $3 trillion of foreign exchange, with a commensurate increase in the Chinese money supply. Converting capital inflows into yuan is the only way foreign capital could actually enter the economy, because you can't build a factory or hire workers with dollars—the dollars need to be converted to yuan, and it is the proper role of the BoC to buy those dollars and issue new yuan in the process. Yet despite massive forex purchases, which relieved pressure on the yuan to appreciate, the BoC still had to allow the yuan to float irregularly upwards. A stronger yuan helped to keep the inflationary pressures of rapid growth under control.

As I explained in this post, it now appears that this process of forex purchases and yuan appreciation is at an end. This is a big deal. China's foreign exchange reserves have not increased for almost two years, and the yuan has been stable against the dollar for the past two or three months. Capital flows and trade flows appear to have reached some kind of equilibrium, just as Chinese and U.S. inflation have converged.

... China's central bank started buying up capital inflows in earnest in early 2001, right about the time that gold was hitting a multi-year low. This came to an end in early 2011, as net capital inflows approached zero, and shortly thereafter gold peaked. Both forex purchases and the price of gold increased by many orders of magnitude over roughly the same period.

Is there a plausible explanation for the strong correlation between these disparate variables? I think there is, but I can't say so with authority.

...

Don Luskin ... argues that the outstanding stock of gold is relatively fixed—growing only about 3% per year—but that the demand for gold has jumped by orders of magnitude since China, India, and other emerging markets have enjoyed explosive growth and prosperity gains. In other words, the number of potential buyers of gold has risen much faster than the supply of gold, so naturally gold's price has increased. This is not a story about massive money printing and hyper-inflationary consequences, it is a story about a one-time surge in the demand for the limited supply of gold.

There has been considerable speculation by savvy observers -- such as financier and author James Rickards -- that "China this year or next will announce a tripling or quadrupling of its gold reserves after acquiring the metal surreptitiously."  As Evans-Pritchard observes in the UK Telegraph, "It is no secret that China is buying the dips, seeking to raise the gold share of its reserves well above 2pc. Russia has openly targeted a 10pc share. Variants of this are occurring from the Pacific region to the Gulf and Latin America."

The FT observed in late 2011, central banks are net buyers of gold for the first time in 20 years.

Can a classical gold standard be far behind?

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The Most Important Thing Holding Up the US Dollar

by Ron Paul

Today’s economic conditions reflect a fiat monetary system held together by many tricks and luck over the past 40 years. The world has been awash in paper money since removal of the last vestige of the gold standard by Richard Nixon when he buried the Bretton Woods agreement — the gold exchange standard — on August 15, 1971.

Since then we’ve been on a worldwide paper dollar standard. Quite possibly we are seeing the beginning of the end of that system. If so, tough times are ahead for the United States and the world economy.

Yellen’s Missing Jobs

March 31, 2014

The new Federal Reserve chairman, Janet Yellen, gave a policy speech today at Chicago, where, in a startling gesture, she mentioned three working individuals by name — Jermaine Brownlee, Vicki Lira, and Doreen Poole. They lost their jobs the Great Recession and have been struggling ever since. It was a refreshing, even affecting demarche by Mrs. Yellen, who has made a return to full employment a public priority. She underscored her sincerity by telephoning Mr. Brownlee and Ms. Lira and Ms. Poole before delivering her speech.

Read More

 


The Rueffian SynthesisJohn D. Mueller

Publisher's Note: Originally released in June/July of 1991, this detailed report discusses Jacques Rueff's economic theories and applies them to modern economic events.

By John D. Mueller

Who Was Jacques Rueff?

... Trained in science and mathematics at the Ecole Polytechnique, Rueff devoted his first theoretical work to showing that the same scientific method applies to “moral” or “social” sciences like economics as to the physical sciences (Des Sciences Physiques aux Sciences Morales, 1922). In both cases, he pointed out, individual acts can be “indeterminate,” but the pattern of large numbers of individual acts can be predicted as a matter of probability. And so in economics no less than physics, as he later wrote, “A scientific theory is considered correct only if it makes forecasting possible.”

Read More

Excerpts From:


by Lewis E. Lehrman

"Forerunners of man lived upon the planet several million years ago. But the unique, modern, social order of man – civilization – emerged only four to five thousand years ago. Historical and archaeological evidence suggests that the institution of money evolved coterminously with civilization. From the standpoint of the 100,000-year history of Homo sapiens, civilization and money are but young and fragile reeds. Today their very existence is threatened by financial disorder."

Learn More

 

Turkey’s Cut-rate Expectations

Kathleen Packard  |  Apr 18, 2014
There is a lot of bad behavior in the global political and monetary world. Much of it comes in countries that should know better. Recep Tayyip Erdogan’s Justice and Development Party (AKP) easily won municipal electons in Turkey but the party’s candidates won far short of the nation’s votes. The Wall...
Hostility toward gold has a long pedigree.  19th century depiction of Pliny the Elder courtesy of the Library of Congress Gaius Plinius Secundus, commonly known as Pliny the Elder, in his The Natural History, Book 33, section 3, writes: Would that gold could have been banished for ever from the earth, accursed by...
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Jacques Rueff, a key figure in European economic circles from the 1930s until the 1970s, was, first and foremost, an...
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