Prepare for a new gold standard

Yao Yudong, a member of the People’s Bank of China’s Monetary Policy Committee, recently penned an article in the China Securities Journal, in which he called for a new Bretton Woods system. This would help stabilise the global exchange rates. By implication, he is calling for a return to the gold standard.

Under the old Bretton Woods system, the US dollar was the global reserve currency, fixed to gold at US$35 per ounce. This is known as the gold standard system, based on which paper currencies were issued. But President Richard Nixon ended this gold standard in 1971 by floating the US dollar outright.

 By doing so, the world moved into the fiat currency system – or paper money system. Ever since, the dollar has been printed out of thin air. But the US has also been able to guard the dollar as the world reserve currency. This fiat currency system has given rise to huge debts, an expansion of the banking system and financial markets, and has become the mother of all volatility. 

Now China is attempting to challenge this fiat currency system. It is no secret that China would like to float the yuan to become an international reserve currency. But China will not bank on the fiat currency system to do so. It is now pegging its yuan to the US dollar tightly. When the timing is right, China will de-link the yuan from the US dollar and fix it to gold instead. This will have far-reaching implications for the global financial system, creating further dislocations and crisis on a global scale.

Also, China has been entering currency swap contracts with other countries to bypass the US dollar. It has currency swap agreements with Brazil, Russia, Iran, Australia and the UK, to name a few. This scheme is developing fast to supplant the dollar with the yuan. 

So it is not a surprise that China is building up its gold reserves in preparation for a big bang revolution of the global financial system.

Even with the strong demand for gold from China, Russia and India, gold prices have continued to be hammered down. Gold prices peaked at almost $1,900 per ounce in September 2011. Now, gold prices are struggling to keep to the $1,300 level. Many commentators, from Mexican billionaire Hugo Salinas Price to former US assistant secretary for the Treasury, Paul Craig Roberts, believe that the gold price squeeze is the work of central planners, who would like to protect the value of the dollar. 

We are now seeing a battle in the gold market, which reflects a broader currency war. The central planners are holding down the gold prices, while China, Russia, India and other central banks and funds are accumulating physical gold in preparation for a big change. This seesaw battle will continue until the great unravelling. 

Interest rates are on a rise. If the US Federal Reserve fails to get control over the bond market, we are going to witness a crisis. Then gold will shine again as China and other countries move to adopt a gold standard to replace the fiat currency system. By that time, history will have been rewritten.