NEW YORK – Despite devaluing its currency four days in a row last week, China appears to be hoarding gold in an effort to win a place in the International Monetary Fund’s Special Drawing Rights, or SDRs.
It’s a move that fund analyst Jeffrey Borneman, CEO of Rampart Portfolio Partners, LLC, described in an interview with WND as, ultimately, a challenge to the U.S. dollar as the world’s leading reserve currency in international trading.
In July, China announced official gold reserves had increased almost 60 percent since 2009, China’s central bank claimed gold reserves were 1,658 tons (53.31 million fine troy ounces) as of the end of June, up from 1,054 tons in April 2009.
Financial analyst Stephen Leeb, the author of various investment newsletters, including The Complete Investor, cited China’s history of publishing unreliable financial data. He said the Chinese estimate was calculated to understate the amount of gold Beijing’s central bank holds through its member banks.
“I would be very surprised if the Chinese don’t have more gold and significantly more gold than the U.S. claims (8,100+ tons),” Leeb said in reaction to China’s July announcement. “I certainly would not be at all surprised if the Chinese have 15,000 tons of gold.”
Borneman noted the IMF is scheduled to meet in October, and on the agenda is whether to allow China’s currency into the SDR pool, a basket of currencies that includes the U.S. dollar, the euro, the Japanese yen and the pound sterling. The U.S. dollar holds the strongest weight at 41 percent, with the Japanese yen in fourth place at 13 percent, in an SDR pool valued currently at slightly more than $200 billion.
“The talk is that China will finally be granted a seat at the adult poker-table with a staggering weight of 12 percent,” Borneman told WND. “The idea is that all countries would forfeit a few percentage points of weighting to accommodate the Chinese yuan [also known as the renminbi or RMB].”
When the Bretton Woods fixed rate system collapsed in August 1973 as then-President Nixon announced what was supposed to be a “temporary” suspension of the U.S. dollar’s convertibility into gold, major world currencies, including the dollar, shifted to a floating exchange-rate system in which the price of the dollar and other major world currencies was set by trading on international currency exchanges.
“The international supply of two key reserve assets – gold and the U.S. dollar – proved inadequate for supporting the expansion of world trade and financial development that was taking place,” explains the IMF “Factsheet” on SDRs, It describes how SDRs created in 1969 were adapted to become a currency trading facility available to play a role in international trade.
“Therefore, the international community decided to create a new international reserve asset under the auspices of the IMF.”
Today, SDRs issued by the IMF are used typically by IMF member nations primarily as a reserve account to support international trade transactions, not as international currency available to settle international debt transactions in danger of default.
In an important step, the G20 summit meeting in London April 2, 2009, crossed the threshold moving toward the creation of a new one-world currency through a proposal calling for the IMF to use SDRs to replace the dollar as the world’s foreign-exchange reserve currency of choice.
Point 19 of the final communiqué from the 2009 G20 summit in London specified: “We have agreed to support a general SDR which will inject $250 billion into the world economy and increase global liquidity.” It was the first step forward to implement China’s proposal that Special Drawing Rights at the International Monetary Fund should be created as a foreign exchange currency to replace the dollar.
Despite the enthusiasm of the IMF to make the RMB the fifth currency included in the SDR basket of currencies, the United States has consistently utilized its veto power to block China. Washington has insisted that China needs “currency reforms,” code words that experts in international finance understand mask a continuing U.S. resentment that China manipulates its currency’s exchange rate. As in the current round of devaluations, Beijing artificially boost its imports in a strategy designed to make U.S. exports to China more expensive.
“China really doesn’t care what place it has at the table, as long as it is included into SDR game,” Borneman argued. “So by devaluing its currency four days in a row, China is giving the IMF room to assert that the world economy is so increasingly unstable that another major currency needs to be added into the SDR basket. China hopes the IMF will take the position that if the U.S. vetoes China’s entry into the SDR one more time, the IMF will strip the U.S. of its veto power.”
Borneman also notes that China has joined the London Bullion Market as a major player at the same time Beijing has moved from trading “paper gold” to trading the real metal through the Shanghai gold market. The aim is to with bid up the price of gold with what Goldman calls the “Shanghai Fix.”
He argues that China’s goal is to “adjust upward” the price of gold to maximize the value of a hoard of gold it holds today, which may be more than double the amount held by the United States.
“The introduction of the yuan to the SDR, coupled with China’s ability to influence the price of gold, is nothing short of a shift in the balance of power the world hasn’t seen since the Bretton Woods Agreement in 1944, just before the end of World War II,” Borneman wrote in a recent newsletter.
“China must make sure the yuan is included in the SDR before it reveals its true gold holdings,” he concluded. “It would not surprise any analyst if China were to state its reserves topped 15 or even 20 thousand tons. An announcement of reserves near this size would immediately cause gold prices to rise substantially.”
Borneman insisted China’s “end game” is to replace the U.S. dollar as the global reserve currency.
“Investors may see the potential described above as analogous to David vs. Goliath in that such a shift would cause an immediate division in the SDR, pitting the dollar against the yuan,” he wrote. “The dollar position, no matter how far lowered [in the SDR] to allow China in, would be at least three times as large as the yuan. This would leave investors the world over with a choice of currencies: one backed by gold, and the other, oil.”
With China still holding $1.2 trillion of U.S. Treasuries and still needing the U.S. market as buyers of its products, Borneman doubts Beijing will push its gold advantage to the limit.
What he calculates is China’s real goal is to force the entry of the yuan into the IMF SDR currency basket, possibly by the end of 2015. Beijing’s entry would push the world farther along the path toward acceptance of the SDR as a new currency international trade, achieved with only a slight rise in gold prices.
“The question then becomes, will that please China or will it want to run the table and end the game immediately?” Borneman asks. “Either way, China will be setting the physical price of gold soon.”
After a nearly three-decade career as a Wall Street trader, Borneman began working independently in 2003, creating Rampart Portfolios LLC. His firm has developed an investment management strategy focused on metals, defense, energy & food sectors that he has trademarked as MDEF™ investing.