First published at www.plata.com.mx

Alasdair Macleod has posted an article at www.goldmoney.com which I think is important. 

(See “Credit deflation and gold”.www.goldmoney.com/research/analysis.)

The thrust of the article is that China, at some point, will have to revalue gold in China; which means, in other words, that China will decide to devalue the Yuan against gold.

Since “mainstream economics” holds that gold is no longer important in world business, such a measure might be regarded as just an idiosyncrasy of Chinese thinking, and not politically significant, as would be a devaluation against the dollar, which is a no-no amongst the Central Bank community of the world.

However, as I understand the measure, it would be indeed world-shaking.

Here’s how I see it:

Currently, the price of an ounce of gold in Shanghai is roughly 6.20 Yuan x $1084 Dollars = 6,721 Yuan.

Now suppose that China decides to revalue gold in China to 9408 Yuan per ounce: a devaluation of the Yuan of 40%, from 6721 to 9408 Yuan.

What would have to happen?

Importers around the world would immediately purchase physical gold at $1,084 Dollars an ounce, and ship it to Shanghai, where they would sell it for 9408 Yuan, where the price was formerly 6,721 Yuan.

The Chinese economy operates in Yuan and prices there would not be affected – at least not immediately – by the devaluation of the Yuan against gold.

Importers of Chinese goods would then be able to purchase 40% more goods for the same amount of Dollars they were paying before the devaluation of the Yuan against gold. What importer of Chinese goods could resist the temptation to purchase goods now so much cheaper? China would then consolidate its position as a great manufacturing power. Its languishing economy would recuperate spectacularly.

The purchase of physical gold would take off, no longer the activity of detested “gold-bugs”, but an activity linked to making money, albeit fiat money. Inevitably, the price of physical gold in Dollars would separate from the price of the “paper gold” traded on Comex and go higher, leaving paper gold way behind in price.

If the US were to provide the market with physical gold in the quantities being purchased for trade with China, it might be able to prevent the rise in the price of gold in Dollars; however, we know that Comex has only one ounce of physical gold for every 124 owners of paper gold, so that action would be impossible. China would be sucking up the world’s gold at a huge rate, if the price of gold in Dollars were to remain where it is at present.

The only way that the US might counter the Chinese move, would be to revalue gold in Dollars; which is to say, the US would have to effect a corresponding devaluation of the Dollar against gold, to nullify the effect of the Chinese devaluation of the Yuan against gold.

At a Dollar price of gold of $1,517 Dollars per ounce, the Chinese devaluation would be left without effect: the present Yuan/Dollar exchange rate would then remain at 6.20 Yuan per Dollar: 9,408 Yuan/6.20 exchange rate = $1,517 Dollars per ounce.

This is the old policy of the 1930’s, commonly known as “beggar thy neighbor”, where countries carried out competitive devaluations against gold in order to preserve their manufactures and continue exporting. The response of importing nations was to raise tariffs on imported goods. (Say good-bye to an integrated world economy.)

Will China decide to “beggar its neighbors”, the US and Europe? I think that the huge problem of keeping the Chinese economy on its feet and avoiding the political instability which would rage through China by not doing so – with a population in excess of 1.3 billion human beings – will be so compelling that China will practically inevitably resort to raising the price of gold in China.

When might this happen? The world economy is going from bad to worse by the day. The Chinese may opt for this measure out of sheer desperation, and it may be a reality soon. I have the sensation that things are falling apart around the world at an increasing rate of speed. Perhaps China will move this Fall?

Devaluing the Dollar on the part of the US would upset the apple-cart of Dollar hegemony in the world. But not to devalue would price US goods out of world markets, along with European goods. “Damned if you do, damned if you don’t.”

Dollar devaluation would force a Euro devaluation and all Hell would break lose, as all countries would belatedly realize the importance of having gold reserves, and one country after another would devalue their currencies against gold. Import tariffs and restrictions on imports would once again prevail. The dream of “Globalization based on the fiat dollar” would evaporate in the orgy of currency devaluations against gold.

The era of the Dollar as reserve currency of the world, would have ended.

When the dust shall have settled on this giant crisis, the powers of this world will have recognized, once again, that gold is money; what would remain would be the work of establishing the gold standard de jure, by international accords, in order to abolish tariffs and import restrictions and renew the free international flow of goods.

However, another horrible scenario is possible: the US, run by those who insist on maintaining the plan for world domination through endless war, may decide to go to war with China and with Russia, too, for good measure. Let us hope that reason prevails and that the Dollar loses its status as world reserve currency in a peaceful manner.