Speaking with Max Keiser’s On the Edge, Currency Wars author Jim Rickards says, the collapse of Lehman Brothers and the Fed‘s response to the crisis convinced China to no longer trust the United States and the dollar-based reserve scheme.
In the past, the thinking among the world’s central banks focused upon the dollar as an anchor for relative valuations of other currencies trading against it. That was a bad idea, according to Rickards.
“We trust the United States to maintain the value of the dollar, so we’ll anchor it [other currencies] to the dollar,” he says. “That trust was misplaced, beginning, really, around 2010.
“The United Sates decided, as a matter of policy, to trash the dollar. The Chinese made one enormous blunder; they actually trusted the United States to the tune of $3 trillion of assets to maintain the value of the dollar.
“China’s learning the hard way that you really can’t trust the United States anymore.”
After that breach of trust, following the Fed completed round of its first QE program, it became clear to the Chinese, according to Rickards, that the Fed intends to devalue the world’s reserve currency and the $3 trillion of U.S. paper it bought as the mechanism of maintaining a competitively cheap yuan against the dollar.
“The Chinese, you know, they don’t want to be the suckers at the poker table. the United States put enormous pressure on China to allow the yuan to appreciate a little bit against the dollar, which it did in 2011.”
Since then, evidence shows the PRC has responding to the Fed through drastically stepping up central bank gold stock at the PBC. But, in the meantime, the race to the bottom of the currency graveyard for the world’s major currencies will continue until that fateful day, when the global system is forced into a ‘big reset’ to another currency regime.
“These things [global currency devaluations] can go on, as I’ve show, historically, for 10 or 15 years,” says Rickards.
“Nobody wins. All get is, either, global inflation or contraction of world trade if the currency wars turn into trade wars,” he adds. At some point, “the system breaks down.”
But, “we’re some years away from that. These currency wars will continue,” he says.
When Keiser likens last week’s Fed QE3 announcement to a “pre-avalanche moment” for the dollar, Rickards agrees.
Yes, “we are in a pre-avalanche moment, Max,” he says. QE3 is a “suicide mission for the dollar.”
All you “have to do is look down the road and envision a Fed balance sheet that has, perhaps, $5 trillion of base money, up from about $3 trillion, today. That’s sort of where we’re heading,” he adds.
So, China’s race to stockpile gold, in earnest, is on, according to Rickards. China needs to acquire more gold reserves to earn a place at the Bank of International Settlements (BIS) table at the time when a new global currency regime is negotiated.
China wants the yuan to be included within the new global currency, necessitating an appreciable increase in the PRC’s gold hoard of an estimated 2,000 tons. No gold, no inclusion.
“We don’t know exactly how much they have, but China is the largest gold importer in the world,” Rickards explains. “They are the largest gold producer in the world. Their mines are producing 300 tons a year, that is by far the largest in the world Where are that 300 tons going? Some of it’s going for domestic purchases, but a lot of it is going to the central bank.”
“To just look at the U.S. in the eye, they actually need 4,000 tons,” he says.
“This is just going to put upward pressure on gold prices for years to come, and my estimate is it will get to $7,000 an ounce, not next year, not immediately, but sooner than later. That’s my target price for gold.”
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