Going for Gold as the Reset Begins

Going for Gold as the Reset Begins

This may be the most important commentary I’ve ever written.

Here’s why.

For years, financial analysts have discussed what’s called the Global Monetary Reset, or GMR. Expectations of a GMR stem from the fact that monetary policies around the world are unstable and unsustainable.

There is no anchor to the system. There is no limit on money printing. And there is no limit on debt creation.

Such a system grows exponentially based on the false belief that governments can spend as much as they want and central banks will pick up the tab or bail out the system as needed.

Politicians love the system because they can buy votes from citizens.

Central bankers love the system because of the power and prestige it brings them.

Citizens love the system because they get handouts, bailouts, pumped-up asset values and other goodies seemingly for free.

What’s not to like?

The problem, of course, is that the system is unstable and unsustainable.

It’s a huge inverted pyramid of promises poised on a small sliver of real money called gold.

It’s bound to tip over and come crashing down as it has many times in the past, from the Jubilees of ancient Israel to the global financial crisis of 2008.

The 2008 panic would have closed banks and capital markets globally but for tens of trillions of dollars of central bank intervention. That bailout money printing has still not been mopped up. The 2008 bailout has sown the seeds of the next crisis.

Viewing this broadly, an objective analyst can see that a new system based on some hybrid of dollars, gold and the International Monetary Fund’s (IMF) world money — special drawing rights (SDRs) — is inevitable. This new system could even include an encrypted distributed ledger or blockchain, and might revert to fixed exchange rates instead of floating.

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The great monetary reset

The GMR would be a return to something like the old Bretton Woods system (1944–1973) but with 21st-century characteristics and technology. This is what is meant by the Global Monetary Reset.

That much is clear. The open issues for students of the GMR are when it happens and how.

There are two answers to the how part.

It can either happen in a proactive way by convening a new global monetary conference similar to Bretton Woods (1944), the Plaza Accord (1985) or the Louvre Accord (1987).

Or it can happen in a chaotic fashion in response to a new financial crisis, as occurred at the G-20 Washington summit led by George Bush and Nicolas Sarkozy in November 2008.

My estimate has always been that the GMR would be conducted in a panic due to the lack of leadership and foresight of the global monetary elites.

The answer to the when part is necessarily uncertain but, given what we know about the dynamics of complex systems and the scaling metrics of the current international monetary regime, the best answer is probably ‘soon’.

In a nutshell, a catastrophic collapse is coming, probably sooner than later, and the result will be an entirely new international monetary system in which the dollar is dethroned as the world’s leading reserve currency and something new is put in its place. That’s the GMR.

But what if I told you the GMR already happened and no one noticed?

How China controls gold

When China instituted a shock devaluation of its currency in August 2015, US stock markets fell 11% in three weeks and it looked like there was no bottom. Then the Fed intervened with a delay of the lift-off in rate hikes from September–December 2015.

China devalued again in December 2015, and US stocks fell 11% again from 1 January to 10 February 2016. It took the G-20 Shanghai Accord in late February 2016 to put an end to Chinese shock devaluations.

This recent history reveals that the US-China cross-rate is one of the most important metrics in world finance.

Let’s call this cross-rate USD/CNY.

But what is an ounce of gold worth in the IMF’s currency, the SDR?

At time of writing, SDR1 = US$1.419, but that rate changes daily like any floating exchange rate.

Let’s call this cross-rate SDR/USD.

While I think about USD/GLD, USD/CNY and SDR/USD all the time, I have to admit I never thought much about SDR/GLD.

Why would I? I don’t own any SDRs and I can’t get my hands on any. The IMF only issues them to member countries, and they’re traded among the members through a secret trading desk inside the IMF.

If I want to buy gold, I use US dollars. In China, they can buy gold with yuan. The idea of buying gold with SDRs may be off in the future, but there’s no active gold market priced in SDRs today.

Or is there?

Before China joined the SDR, both the US dollar price of gold and the SDR price of gold were volatile. After China joined the SDR, the US dollar price of gold continued to be volatile, but the SDR price of gold exhibited much less volatility, especially after the first few months.

Gold versus US dollars versus SDRs


Source: DH Bauer

The timeline along the horizontal x-axis runs from 31 December 2014 to 31 March 2018. The price line along the vertical y-axis is measured in units of dollars or SDRs depending on the data series. The units run from 700–1,400.

The red line is the US dollar price per gold ounce (USD/GLD).

The dark-blue line is the USD/GLD trend. The green line is the price per ounce of gold in SDRs (SDR/GLD). The purple line is the SDR/GLD trend.

Most importantly, the trend line of SDR/GLD is a near-perfect horizontal line.

In short, world money has now been pegged to gold at a rate of SDR900 = 1 ounce of gold. It’s a new gold standard using the IMF’s world money.

There’s the GMR right in front of your eyes.

It takes a while to sink in.

Why did SDR/GLD go from normal volatility to no volatility overnight?

The straight-line behaviour of SDR/GLD after the Chinese yuan joined the SDR is impossible without some kind of intervention or manipulation. The odds of this happening randomly are infinitesimal.

The SDR/GLD horizontal trend line after 1 October 2016 is an example of what statisticians call autoregression. This only appears if there’s a recursive function (a ‘feedback loop’), manipulation, or if it’s presented as a fraud.

This is how Harry Markopolos spotted the Bernie Madoff fraud; Madoff’s returns were too steady and consistent to be real given the volatile nature of capital markets.

To peg a cross-rate, in this case SDR/GLD, you need a large floating supply of both components or a printing press to make as much as you need. Basically, you conduct open market operations.

If the SDR price of gold rises above SDR900, you sell gold and buy SDRs (or the currency basket).

If the SDR price of gold sinks below SDR900, you buy gold and sell SDRs (or the currency basket). By monitoring markets and intervening continually with open market operations in gold and currencies, you can maintain the peg.

There are only four parties in the world who could conduct such a manipulation: the US Treasury, the ECB, the Chinese State Administration of Foreign Exchange (SAFE) and the IMF itself. These are the only entities with enough gold and SDRs to be able to conduct the open market operations needed to peg the price.

That leaves SAFE and the IMF. Both are non-transparent.

China has about 2,000 tons of gold (probably much more, but it doesn’t disclose the excess) and has been acquiring SDRs in secondary market trading in addition to official allocations to IMF members.

The IMF has about 1,000 tons of gold and can print all the SDRs it wants with its SDR printing press. The IMF also makes loans and receives principal and interest in SDRs. The SDRs can be traded through the IMF’s secret trading desk.

The gold can be traded secretly through the Bank for International Settlements (BIS), which traded Nazi gold in the Second World War. The BIS is super-secret and is controlled by the same people who control the IMF.

China can also conduct gold purchases and sales for yuan or dollars on the open market in Shanghai and London and separately buy or sell SDRs for dollars or yuan. China can also buy or sell the SDR basket currencies separately as a synthetic SDR to manipulate the price of the actual SDR.

This kind of intervention by China to maintain the SDR/GLD peg might also explain the mysterious ‘gold slams’ we see in Comex gold futures trading with regularity.

The informal gold peg

The SDR is an ideal vehicle for a gold-backed currency because it has the support of every major economic power on Earth through the IMF.

The bottom line is that China has now pegged the SDR to gold.

This is highly ironic, because when the SDR was created in 1969 it was originally pegged to gold and defined as a weight in gold (SDR1 = 0.88867 grams of gold).

That peg was abandoned soon after, even as the US dollar peg (USD1 = 1/35th ounce of gold) was also abandoned.

Since this SDR peg to gold is informal, it can be abandoned at any time.

It probably will be abandoned because the Chinese sponsors of the peg have ignored the lessons of 1925, when the UK returned sterling to the gold standard at the wrong price.

The result was catastrophic deflation that presaged the Great Depression.

The Chinese peg of SDR900 is far too cheap to be sustainable given the scarce supply of gold and the growing supply of SDRs. More to the point, the IMF will print trillions of SDRs in the next global financial crisis, which is likely to prove highly inflationary.

Still, this is a historic development, and we’ll be watching it closely.

Even if the peg is unsustainable in the long run, it’s a clear short-run signal that China is betting on the SDR and gold — and not the yuan or the US dollar.

All the best,

Jim Rickards Signature

Jim Rickards,
For The Daily Reckoning Australia