The Chinese Silver Download Experience

Song Chao - Chinese Coal CommunitySomewhere in 18th century Scotland, a writer is making the rationalist case against gold and silver. I’ll conjecture such a counterpoint rebuttal to precious metal coinage (and convertibility of notes) has appeared on occasion during the entire 5000 year history of gold’s employment as money, if not longer. Indeed, a modern version of the argument can be found today. You know the bullet points: gold has no earnings, no yield, cannot be valued by any reasonable metric, and is nothing more than a hunk of inanimate metal. More to the point of the rationalists is that gold has little value in use, and may actually be a religious object. Thus, gold trades in the medium of signs and symbols, and once discovered as such, will come in for a brutal puncturing. The problem I have with this argument is as follows: it’s irrational.

It would be one kind of argument to state that mud cannot be used in engineering to build skyscrapers. But  it’s another kind of argument to claim that gold and silver have faulty internal structures too, that contain the seeds of their own collapse. Physics is physics. Money is psychology. Thus, the rational argument against gold and silver, because it presumes rationality in human beings, is irrational.

We shall see of course which forms of money the world will accept in trade for such things as grains, goods, and oil in the years ahead. Or perhaps even in the year ahead.  Before World War II, in this century, that largely fell to British Sterling. Since World War II the preferred form has been the US Dollar. Both of these currencies also trade, and traded, in a universe of signs, and symbols. Indeed, they have traded as totemic accessories of Empire.

Wayne Levin, Untitled, 2004Now comes China however with its vast array of built capital stock and a great wall of monetary reserves. As I wrote in the Seigniorage Curse, the Dollar paradigm started out as a justified paper currency regime tethered to the productive and innovation capacity of the United States. But the regime wound up as a scheme to extract, not provide, value — and the multi-decade premium accorded to US purchasing power became the mechanism, in part, that hollowed out our economy through financialization. It’s not so surprising therefore that large holders of dollars–at this point in the dollar’s life cycle–would want to exchange them.

At Gregor.us I’ve been writing the past year about these issues with particular attention paid to the myriad ways China could convert dollars to other assets. But starting in August, both at GregorWeekly.com and also in my Gregor.us Monthly newsletter, I began to target my commentary more frequently to the issue of money itself. China’s new September push, for example, to encourage investment in gold and silver amongst its citizens is nothing less than extraordinary. The promotion comes amidst a sense that the economic policy talks between Washington and Beijing, which surely take place on an ongoing basis, have perhaps not gone well of late. Each week brings another surprise too, from Hong Kong’s request that all its gold be repatriated from London, to today’s rumor that China will ban all exports of gold and silver.

It appears that China has decided to leverage the sheer scale of its own population, to effectively download the world’s gold and silver into a billion different hands. The ability to buy precious metals at one’s local bank, in small bar denominations, is the distribution channel. Some have suggested this policy may double as a way to dampen currency based inflation internally. If that’s the case, then the question remains whether the state will use Yuan, Dollars, or both Yuan and Dollars to carry the new inflows of metal, into the country. We await that particular answer.

-Gregor

Photos: Chinese Coal Community, by Song Chao. | Untitled, by Wayne Levin, 2004.

  • Jeff Out West

    I'm curious to learn more about China and it's urging for the rank and file to buy gold & silver. If the state controls purchases by the public it could be a very effective means of “taxation” – Sell at $1,000 / redeem at $500. That too would dampen inflation! Without exports of gold it would have even greater control over the market.

    Like our housing market bubble – an internal China gold bubble would be an effective way of transferring “wealth.” China issue Franklin mints to a culture obsessed with gambling -sounds like a bubble a state could control

  • David F.

    Jeff Out West – I feel your arguement is preposterous, if not just illogical. Should individual Chinese citizens begin to acquire precious metals en masse, it would create the greatest demand on gold that has ever been seen in history. With a basic premis being supply and demand determine price, the demand would begin to greatly outstrip supply (especially with today's ETFs and a worldwide cessation of governmental selling of the metals). This price will, in my opinion, explode to the upside once the public begins to awaken and realize that, why gold might be a simple piece of metal, that it far superior to your dollar or Euro, which is simply a piece of paper. Look a bit through history and try to find a single example of a currency not backed by gold or silver that has lasted more than 200 years. It is going to take you a long, long time because none exists. That being said, gold will only be worth $5,000 per ounce when oil costs $300 per barrell and a gallon of milk costs $30. Simply speaking, gold has held its value for the past 5,000 years. For hundreds of years one ounce of gold has been able to buy a hand tailored suit. I think that is true today, as always. It also tends towards a multiple of the cost of a barrel oil. I am not sure on this one, but I think that it tends towards 9 barrels. Thus, one way of looking at things is to suspect that gold should be dropping to ($70/barel x 9 = $630 per ounce), or that oil will move over $100 per barrel. However, nobody can foresee the future. The only thing I can guarantee is that gold and silver will still have value after we are long dead, that their value has never dropped to zero, and that paper currency of any nation can become worthless almost overnight (i.e. Zimbabwe, Italy, most of South America, Rome, Greece, etc. etc. etc.). In the words of a rather verbose editor states at the end of all of his newsletters, “Buy Gold – Whee, this investing stuff is easy.” gold@davidvfarrell.com

  • Jeff Out West

    An ounce of Gold buys a tailored suit?

    A tailored suit costs closer to $2,000 and has for over a decade.

    A $300 (Gold in 2000) suit ten years ago was not a custom made suit but most likely bottom rack at Pennys.

  • But What Do I Know?

    Very thoughtful, Gregor, and very nice writing in paragraphs 3 and 4. The problem of storing wealth has been around since the beginning of civilization, and gold and silver were and are just another way of attempting to solve it. They are useless in the way the Oscar Wilde said that Art was quite Useless–they don't put food in our stomachs or roofs on our heads. But human psychology is ultimately what provides value to any good, so why should gold and silver be different?

    God help us if money ever loses its motivational power–it is all the more reason to be careful in our experiments with fiat currency composed of electronic impulses.

  • But What Do I Know?

    Very thoughtful, Gregor, and very nice writing in paragraphs 3 and 4. The problem of storing wealth has been around since the beginning of civilization, and gold and silver were and are just another way of attempting to solve it. They are useless in the way the Oscar Wilde said that Art was quite Useless–they don't put food in our stomachs or roofs on our heads. But human psychology is ultimately what provides value to any good, so why should gold and silver be different?

    God help us if money ever loses its motivational power–it is all the more reason to be careful in our experiments with fiat currency composed of electronic impulses.

  • http://www.alphanetworker.org/ Andrew Murray

    Gold is the clear opposite of fiat currency.

    So a devauling dollar necessarily leads to higher prices in commodities

  • http://www.alphanetworker.org/ Andrew Murray

    Gold is the clear opposite of fiat currency.

    So a devauling dollar necessarily leads to higher prices in commodities