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Gold Friendly BRICS Challenge the Dollar and the Fed

BRICS“All the News That’s Fit to Print” is still a slogan published at the top of each daily issue of The New York Times. Yet as I opened my copy of that paper on July 16, not a word was printed to discuss the July 15, 2014, announcement in Brazil by the BRIC nations that they are establishing a $100 billion reserve to bypass the Fed and to develop their own network of central banks. In other words, as the U.S. military and NATO knock on the door of Russia in the Ukraine, and as the U.S. commands China not to develop its own navy to protect its own sea lanes and chooses to impose sanctions to get its way to dominate those countries, the BRIC countries are screaming “ENOUGH!”

mapIn an attempt to protect themselves from the NATO and the military industrial complex that is seeking to become lord over all the earth (including its own citizens), and to protect themselves from the system of theft that the dollar provides the ruling elite, who run NATO and the Anglo American empire, which imposes its rule by military force, the BRICS believe they have no choice but to set up their own banking, payment, and trading systems to survive the squeeze that the Anglo American empire is imposing on them.

Not only the BRIC countries but also some of our strongest Allies are turning cold against the kind of aggressive action carried out by the U.S. When the U.S. forces sanctions against Europe not to trade with Russia that are very costly to European economies and the NSA spies on them and retains personal data, Europeans are beginning to wonder why they should remain slaves of NATO so many years after the Anglo-American empire conquered Europe. What does Europe gain from doing its part to aid the Anglo-American empire? And to be sure, not only are top leaders and large corporations turning against U.S. policies that hurt them, but there also is a huge and growing anti-Fed movement from the masses. If you do not believe it, check out this link http://ow.ly/zeQGz, which provides a video discussion of a growing end the Fed movement that is sweeping through 128 cities in five countries (Germany, Switzerland, Austria, Australia, and New Zealand). And I believe the person in the video said a protest is planned in Vancouver in the near term.

The BRIC countries, which have a combined population of over 3 billion people, are pressured to provide the best they can for them. The need to do so many times is in conflict with the desires of the Anglo-American empire.

When the Soviet Union fell, the U.S.—under Bush I—promised the Russians that NATO would not acquire any more of the Soviet Bloc countries under its umbrella. As the promise was not kept, with one after another eastern European country gobbled up by NATO, starting during the Clinton Administration, the relationship with Russia has grown colder.

The ability of the U.S. to finance its military force and propaganda operations to encroach on Russia’s natural markets with surrounding countries and thus threaten Russian sovereignty is made possible only by the U.S. being able to print endless amounts of units of currency out of thin air, which are then used not only to fund country conquests but also to rob net exporting countries, like China, of the wealth it gained by manufacturing and selling goods all over the world that are largely still denominated in dollars.

growthThe appetite for dollars plunged with the Wall Street sewage that led up to the housing crisis that precipitated the deepest and more serious depression since the 1930s. While various countries outside of NATO had become increasingly irritated by an American and NATO military that threatened their national sovereignty, it was not until the pathology of the American economic empire began to threaten their own well-being in dramatic fashion that the BRIC countries really start to talk about pushing through an alternative to the U.S. dollar global monetary system.

Below is a chart of the annual growth rate for Global U.S. Dollar Liquidity (GUSDL). It was first brought to my attention by Charlie Clough, who was an analyst at Merrill Lynch during the Asian crisis of the last 1990s. It is a sum of U.S. dollars held by foreign central banks plus the U.S. dollar monetary base.

If this measure of liquidity is shrinking as it was during the Asian crisis, it suggests a deleveraging process is underway—in which event, a business recession is likely to occur. The other extreme suggests inflationary pressures are building in the system.

After the Asian Crisis, under Fed Chairman Alan Greenspan, the Fed began generating huge amounts of money that led to mal investment and horrendously damaging bubbles. The tech bubble, the housing bubble, and now the granddaddy of all bubbles—the U.S. Treasury bubble—have never been allowed to deflate and by so doing cleanse the system. But I point out to you the huge spike in GUSDL that peaked in Jan. 2009 at an astounding annual rate of 48%. That sheer insanity really started the BRICS to seriously start to plan the construction of a banking system that would enable it to exit from what they rightfully have viewed and continue to view as an increasingly pathological U.S. dollar-centric monetary system.

RussianpctWith Quantitative Easing (QE), the portion of GUSDL held by foreign central banks plunged. Just before the Lehman banking crisis, foreign central banks held approximately 73.5% of GUSDL. You can see from the chart above, the precipitous percentage drop in foreign holdings of U.S. dollars and a continuous decline to a level of 45% now. The foreign nations want no part of U.S. Treasuries, and why should they? They are aware not only that U.S. Treasuries fund military aggression against many of the creditor nations; they also rightfully recognize that the U.S. Treasury market is the granddaddy of all bubbles. When it collapses, the losses from holding those instruments will be gargantuan simply because the Fed is both defying the natural laws of economics with respect to the price of capital as well as destroying the U.S. economy in the process by continuing to encourage excess consumption, relative to savings.

Not specifically talked about much if at all in the official announcement by the BRICS, but certainly a cornerstone in establishing a competing monetary system, is a role to be played by gold. China and Russia in particular have talked about that increasingly since Lehman Brothers, though it is seldom if ever mentioned in our mainstream press. If you doubt that China and Russia have plans for gold to become an integral part of their new monetary system to compete against the U.S., think again! As U.S. policymakers bad mouth gold so that you will continue to accept/use units of currency that they counterfeit, Russian and China are letting anyone know who wants to know, that they are not being duped, as Americans are, to accept the dollar. Instead, they have been trading in their dollars for gold, as the following charts demonstrate.

weeklyWe have heard a lot in the non-mainstream press about the massive amounts of gold that have been flowing into China. But not much is said about gold imported into Russia. Notice the massive buildup of gold by Russia starting in 2008. Yet the chart shown on your left displays gold holdings of the Russian central bank, which have nearly tripled since 2008.

Credible Internet sources, most notably from Koos Jansen on www.InGoldWeTrust.ch, have talked about how in 2013 imports into China came close to if not surpassing the entire amount of gold produced in that year.

M2The chart below on your left showing weekly gold withdrawn from the Shanghai Gold Exchange provides a sense of the enormous amount of physical gold as opposed to paper gold that is being hoarded by the Chinese population. Those people know from experience that you can’t trust paper money, and the leaders of China know it very well, too, which is no doubt another reason they are doing what they can to (1) build an alternative monetary system as part of the BRICS, and (2) seek to exit the dollar as gracefully as possible.

Meanwhile, Americans are asleep at the switch. They don’t think gold matters. But millions of Americans are going to find out that it does matter, though it’s hard to predict when the dollar will start its relative decline as a result of its loss of acceptability for trade as well as a storage value.

Americans continue to hold the dollar because they have no choice. They need dollars to pay their bills and buy their groceries. And as the middle class shrinks and millions of Americans join the poverty class, the tendency is to hang on ever more tightly and spend only for absolute necessities. I believe the depression, which the U.S. has never really come out of, is the reason people are hanging on to money more than at any time since velocity was measured in the late 1950s, as the chart on your left of M-2 velocity shows.

Foreigners do not have the same need to hold dollars. Indeed they are already refusing to buy U.S. Treasuries anything like the Fed wants them to be issued and so the Fed is forced to buy them as noted above. Generally speaking, the BRICS are countries that create wealth while the West in general is comprised of consuming countries that are net consumers. Once the BRICS set up their own banking system, this group of countries will be in a much stronger position to demand many more dollars in exchange for the goods they sell us. Producers of valuable commodities and manufactured goods will be able to sell their products within the BRICS trade group and receive a currency of integrity—one with at last a gold component to it rather than a worthless currency that holds value mostly because of a NATO military operation that forces foreigners to accept dollars. At that point in time, the BRIC nations may be able to demand many more dollars for the goods they sell us or demand payment in gold. And since the West will have exported most of its gold to the BRICS (mostly to China), the price demanded for manufactured goods and basic commodities sold by the BRICS to the West may be extremely high. In other words, we could see a massive weakness in the dollar, which would likely in turn lead to an astoundingly high gold price.

Is this sheer fantasy on my part? Am I talking my gold book? I won’t try to deny my pro-gold partiality. But keep this in mind. Reserve currency status doesn’t last forever. The U.S. has had a rather long run and one that is not much shorter than others’ reserve currency runs.

Jay Taylor



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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