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Gold and the Currency Nobody Wants

The panic about the dollar

This morning I was watching a TV program on China’s CCTV-4 which talked about the history of gold, historically and in China. The program, all in Mandarin, had a fascinating format. It started off with history and the Bretton Woods agreement of 1945 and when the US controlled about 80% of the world’s gold reserves. At the time, the US Federal Reserve had a standing policy of letting non-US citizens redeem their gold at a price of US$35 per troy ounce, while not allowing Americans to own gold. Then, as the value of the dollar fell, Nixon basically opted out of Bretton Woods and the US government would no longer redeem gold. This started the period of different currencies floating against each other in floating exchange rates.

Before and during Bretton Woods, because of the tie to gold, the US dollar was often referred to as “meijin” 美金 instead of the now popular term “meiyuan” 美元 or US dollar. The implication is that in earlier times, the US dollar was as good as gold.

Not now.

In 1979 with 17% inflation in the US and the Soviet invasion of Afghanistan, gold shot up to US$850 an ounce. Then when things settled down, so did gold prices.

Now, because of all the trouble with the US dollar and the subprime mortgage crisis, gold is back between US$700-800 per troy ounce.

Then the program took a curious turn and started interviewing Chinese who were investing their savings in gold. The best way to describe it was as if it had suddenly become the Home Shopping Channel program for gold. China opened up the gold market to trading for Chinese retail investors in Oct. 2002. Then it proceeded to interview housewives and ordinary Chinese urban consumers about their investments in different gold markets, all in China, and how much money they had made. Then there were interviews with gold analysts for gold exchange websites, all of whom were gold bulls.

And this program went on and on for an hour. The interesting thing is that this program was broadcast on CCTV-4, which is the news channel. And of course, nothing gets on this channel without official approval. The underlying message of the program was that gold is a good investment for Chinese investors in turbulent times. Not euros, not yen, and certainly not the dollar.

Gold. So go forth and buy gold, and rest assured that you will not lose your investment money. I could not escape the impression that the Chinese government was trying to talk its citizens out of putting their savings in dollars, and wanted them to save their money in gold.

Fascinating!

Ever since the subprime mortgage crisis began, the US dollar has become the currency nobody wants. Private equity and venture capital firms from the US have been actively investing in Chinese companies, just because they want to get out of US dollars. This pace is picking up as even the top-tier VCs from the US are relocating to China. Sometimes I think that if you breathe and can count to 10 in English you can get seed funding for your China startup. (Follow-up rounds are not as easy; they depend on company fundamentals, at least for now.)

It seems like the Chinese are getting tired of buying economic activity in the form of exports to the US, and getting paid in depreciating dollars. Add to that some other recent tensions, and you get the picture that things are going to start getting more rocky on the economic, military and political fronts.

There was a time when the US financial markets were looked up to and trusted by the Chinese and the rest of the world as a model. That trust has been shattered. At the end of the day, that is what capital markets depend on to work: trust. Already we are seeing a trend away from going public in the US and to other capital markets.

All of this adds up to my view that globalization is one of those ideas which makes good sense when viewed from 30,000 feet, but simply will not work in the real world of economic, political and military power.

The US dollar’s fall, in a way, is a direct result of globalization. When the US had the world’s leading economy and was the home of the world’s most voracious consumers (consumers who continued to consume even after they had no savings), the rest of the world had almost no choice except to use the dollar as the main currency for international transactions. With the rise of Japan, then the European Union, and now China and the African nations, that has all changed. Economic strength and activity are now highly diversified; there is no single center of power.

China is investing heavily in the development of Africa. The world-famous China-Europe International Business School (CEIBS) based in Pudong, Shanghai will soon announce plans for an African campus. Other parts of the world, including India and oil-rich countries of the world continue to grow. And they have less need for dollars which continue to depreciate in value. Add on to this the general unpopularity of US foreign policy in the rest of the world. They are looking for more stable investments which more or less keep their value.

All this adds up to a picture of a world which has less demand for dollars. If the US did not rely on depreciating the dollar as a policy to lessen the debt burden, the falloff would not have been as precipitous as it has become. Sometime soon, American consumers will have to learn about living within their means, and saving money. I’m of the opinion that the sooner they learn, the better. In order for it be worthwhile for Americans to save, the dollar must be stable.

If there is one thing impressive about China, it’s all the investment in infrastructure. Sure, a lot of it is tacky and even poorly constructed, and sometimes there are bridge collapses, but it is getting better in quality. Most importantly, the government is building for the future.

It’s time the US started investing more in its own future, instead of just consuming for today.

But now, the world is looking for other choices besides the US and the US dollar. And globalization is giving the rest of the world more choices to pick from.




3 Responses to “Gold and the Currency Nobody Wants”

  1. [...] Gold and the Currency Nobody WantsBy adminIf the US did not rely on depreciating the dollar as a policy to lessen the debt burden, the falloff would not have been as precipitous as it has become. Sometime soon, American consumers will have to learn about living within their …The China Vortex – http://www.chinavortex.com [...]

  2. [...] Gold and the Currency Nobody Wants [...]

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