"I, for One, Welcome Our New Chinese Overlords"
- In a just world, China would ditch the dollar… but is it a just world?
- Jim Rickards on China’s golden endgame… and it’s not what you might think
- The world is awash in oil… and Byron King says we need more
- Wait till you hear how much more crude we need beyond all the new U.S. production
- Accept no substitutes: Only these three Rickards publications are the real thing
Let’s begin this morning by connecting a few dots. Most of them will be familiar to you if you’ve been reading The 5 for the last year or so — especially the “de-dollarization” phenomenon…
- China and Russia and several other emerging-market nations are chafing under American dominance of the current global monetary system
- China is forming alternative bodies of nation-states that exclude the U.S. — the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB), sponsored by the BRICS nations
- China is also loading up on gold. At this stage, the People’s Bank of China might have three or four times the officially stated total of 1,054 metric tons.
So far so good. The problem comes when certain “gurus” and websites take the foregoing facts and draw the following conclusions…
- One day — any day now, in fact! — China will declare a new total for its gold holdings and tell existing institutions like the World Bank and International Monetary Fund to go to hell
- China will back the yuan with gold and use the AIIB and NDB to lead a new global financial order
- The dollar will collapse and gold will reach $5,000-$10,000.
This is what happens when people confuse logical analysis with wishful thinking.
Or alternatively, it’s what happens when people engage in “just world” investing.
We coined the term late last year when we observed a 10-year U.S. Treasury note commanding a yield of only 2.29% (not far from where it is this morning). In a just world, we said, bond traders would be punishing Uncle Sam for running up an $18 trillion national debt… and the yield would be leaping skyward the way it did in the late 1970s.
But it’s not a just world, and you put your wealth at risk investing in a just world.
The same goes with the Chinese gold/dollar collapse scenario. Not that we don’t sympathize. We understand the mindset completely.
It’s the same mindset that went into a viral video from late 2010. You might remember it — a commercial produced by Citizens Against Government Waste. It was set 20 years in the future at a Chinese university, where a lecturer described America’s downfall and China’s rise…
“Of course, we owned most of the debt, so now they work for us”
C’mon, admit it: There’s a part of you that wants that to happen. Only then would the politicians and central bankers who ran up the debt and caused the Panic of 2008 get their comeuppance.
Meanwhile, you’d have your $10,000-an-ounce gold… you’d come out of it all smelling like a rose… and you’d finally show up that smartass brother-in-law who laughed at you when gold was crashing in 2013. Right? Am I right?
It’s OK. We understand. You’re among friends here.
Our Jim Rickards wishes to weigh in: “As usual, the truth is much more intriguing than the popular version.”
Jim is gently trying to awaken us to reality. And the reality is this…
“China is not trying to destroy the old boy’s club — they are trying to join it,” he says.
“The yuan is not ready to be a true reserve currency and will not be ready for years to come. It is still used for less than 2% of global payments, compared with over 40% for the U.S. dollar.
“The key to being a reserve currency is not payments, but investments. There needs to be a deep, liquid bond market denominated in the reserve currency. That way, when countries earn the target currency in trade, they have someplace to invest their surplus.
“Right now, if you earn yuan trading with China, all you can do with the money is leave it in a bank deposit or spend it in China. There is no large yuan-denominated bond market to invest in.”
Oh, and don’t expect fireworks when China updates its gold holdings later this year.
“China has three accounts where they keep gold,” Jim explains — “the People’s Bank of China, PBOC; the State Administration of Foreign Exchange, SAFE; and the China Investment Corp., CIC.
“China can move enough gold to PBOC when they are ready and report that to the IMF for purposes of allowing the yuan in the SDR. Meanwhile, they can still hide gold in SAFE and CIC until they need it in the future.”
So what’s China’s endgame, then? It’s that proverbial “seat at the table” Jim’s been telling us about for two years now.
“China wants to do what the U.S. has done,” Jim tells us, “which is to remain on a paper currency standard but make that currency important enough in world finance and trade to give China leverage over the behavior of other countries.
“The best way to do that is to increase its voting power at the IMF and have the yuan included in the IMF basket for determining the value of the special drawing right. Getting those two things requires the approval of the United States because the U.S. has veto power over important changes at the IMF.
“The result is a kind of grand bargain in which China will get the IMF status it wants but the U.S. will force China to be on its best behavior in return. This means that China must keep the yuan pegged to the dollar at or near the current level. It also means that China can have gold but can’t talk about it… The rules of the game say you need a lot of gold to play, but you don’t recognize the gold or discuss it publicly.
“Why would China want to give up on fiat money any more than the Fed or the European Central Bank? All central banks prefer paper money to gold because they can print the paper kind. Why give up on that monopoly of power?”
“Gold is still the safest asset,” Jim concludes, “and every investor should have some in their portfolio.
“The price of gold will go significantly higher in the years ahead. But contrary to what you read in the blogs, gold won’t go higher because China is confronting the U.S. or launching a gold-backed currency.
“It will go higher when all central banks, China’s and the U.S.’ included, confront the next global liquidity crisis, worse than the one in 2008, and individual citizens stampede into gold to preserve wealth in a world that has lost confidence in all central banks.
“When that happens, physical gold may not be available at all. The time to build your personal gold reserve,” says Jim, “is now.”
While that brother-in-law’s still laughing at you.
[Ed. note: Once you’ve built your personal gold reserve, you’re ready to move up to the next level of Jim’s wealth-building plan… designed to profit from the very sort of central bank scheming he’s described in today’s episode of The 5.
Here’s where you can make up to 10 times your money, or more, from the ongoing currency wars. Jim shows you how his proprietary system works — no long promotional video to watch, we promise — when you follow this link.]
Meanwhile, U.S. markets are idling ahead of the release of FOMC minutes later today.
The minutes from the April 29 meeting of the Federal Reserve’s ironically titled Open Market Committee come out today. They should throw some light, however dim, onto the Fed’s plans concerning any upcoming interest rate hike.
Stocks are sitting tight for now, waiting for the news. The S&P is off a tick at writing. The Dow is up five points.
The yellow metal is up a few bucks today, to $1,210. And West Texas Intermediate is up 68 cents, to $58.67 a barrel, after oil prices slid 3% yesterday.
“The world needs new energy discoveries!” says our Byron King — with a counterintuitive proposition in light of oil’s tumble late last year and early this.
Byron spent time earlier this month at the Offshore Technology Conference in Houston. His big takeaway: “Low prices are now sowing seeds of another round of price creep upward for oil.”
The North American fracking phenomenon has added 5 million barrels of daily global crude production. “But the rest of the world isn’t there when it comes to increasing oil output,” says Byron. “U.S./Canadian fracking, and oil and liquids from fracking, has masked global oil decline.
“Imagine what might have happened to world oil prices over the past five years absent that ‘extra’ U.S. oil. With the rest of the world in overall decline, we’d likely have experienced oil shortages at times and places, with the price spikes and political and banking shenanigans that come with them.”
Then again, we might not have to imagine — based on some insight Byron gleaned at a private get-together held on the sidelines of the conference.
“According to one senior energy executive from Norwegian powerhouse Statoil, as we look ahead, the world will have to endure lower oil overall oil output, ‘unless we can find two more Saudi Arabias worth of production in the next 10 years.’
“That is, based on current depletion from legacy assets, the world oil industry needs about another 20 million ‘new’ barrels — per day! — by 2025 to make up for depletion of currently producing fields and regions.”
Again, U.S. and Canadian fracking have generated only 5 million new barrels. That’s half a Saudi Arabia. Long way to go.
“And this is just to replace old, dry wells,” Byron hastens to add; “it’s got nothing to do with growing global demand.”
“So where will the next great oil finds occur?” Byron asks. “Well, consider that, per the International Energy Agency, about 30% of the world’s daily oil supply now comes from offshore oil wells, and the number is growing. In addition, much of the best prospective acreage across the world is offshore.
“Thus, it’s a safe bet — an investable bet — that offshore energy development offers many of the best future opportunities among both operators and service plays.”
One of Byron’s longtime favorites in the space is FMC Technologies. “Even in a low-price oil climate,” he says, “FTI is winning more and more business for the most difficult sort of projects — deep-water, far-offshore, hard-to-get places, you name it.”
“I understand that the U.S. faces some severe problems in the future,” a reader writes, “and I recognize that Jim Rickards is in the loop and extremely knowledgeable.
[We’ve been at this long enough to anticipate the inevitable “but”…]
“However, I do think he has become an opportunist with all his publications. I had just subscribed to Strategic Intelligence, and since then, there are two more out, along with similar offerings from some other publishers.”
The 5: As the old ad slogan goes, accept no substitutes. Jim’s output for paying newsletter subscribers is available only through Agora Financial. And the only Jim Rickards services we offer are…
- Jim Rickards’ Strategic Intelligence: This is Jim’s entry-level newsletter, packed with macroeconomic insights and investment guidance you won’t find anywhere else. If you’re simply looking to hang onto what’s yours during an approaching economic and financial storm, this is really all you need. If you’re not a subscriber yet, the free-book offer is still available
- Jim Rickards’ Currency Wars Alert: This is a premium trading advisory, for which we charge a premium price. This is where Jim’s proprietary IMPACT system aims to anticipate the moves of governments and central bankers in the currency wars, delivering big profits in a short time frame. Details here
- Jim Rickards’ Intelligence Triggers: This is another premium trading advisory, also commanding a premium price. Here Jim applies the same techniques he’s used in his work with the U.S. intelligence community to the markets. Again, the aim is for substantial profits in weeks or months, not years.
The last of these three services is currently available only in a “bundle” with other two and as part of the platinum-level Agora Financial Reserve. When we’re ready to offer it as a stand-alone, you’ll be the first to know.
The 5 Min. Forecast
P.S. As I said on Monday, we’re also close to making a major announcement with Jim. I’m still not at liberty to say any more than that.
I can tell you this much: His current subscribers will learn about it before the general public. If you’re among those current subscribers, we figure we owe you the courtesy. If you’re not among his current subscribers, you can remedy that here. Stay tuned…