Tuesday, January 11, 2022

Follow the gold, follow the food - they tell the same story


Two interesting developments tell the same story in a nutshell, for those with eyes to see and ears to hear.

The first is the growing move towards gold by national reserve banks, rather than continue to put their trust in the US dollar.

Central banks around the world are increasing the gold they hold in foreign exchange reserves, bringing the total to a 31-year high in 2021.

Central banks have built up their gold reserves by more than 4,500 tons over the past decade, according to the World Gold Council, the international research organization of the gold industry. As of September, the reserves totaled roughly 36,000 tons, the largest since 1990 and up 15% from a decade earlier.

The value of the dollar against gold has dropped sharply over the last decade as large-scale monetary relaxation has kept boosting the supply of the U.S. currency. Although the U.S. Federal Reserve is starting to tighten its grip on credit, other central banks continue their shift to gold, reflecting global concerns about the dollar-based monetary regime.

. . .

Recently, the central banks of emerging economies, which tend to be exposed to plunges in the value of their currencies, and of Eastern European countries of limited economic scale have been noticeable buyers.

. . .

The global financial crisis of 2008 caused an outflow of funds even from U.S. government bonds, resulting in falls in the value of dollar-denominated assets. Trust in dollar assets thus "faltered," said market analyst Itsuo Toyoshima ... The presence of the dollar in foreign exchange reserves is falling, in contrast with the growth of gold. In 2020, the currency-by-currency ratio of the dollar fell to the lowest level in a quarter of a century ... The Fed has made clear it is ending its easy money policy and projected that it will begin raising interest rates in 2022. But the central banks of emerging economies are likely to continue their shift to gold from the dollar.

There's more at the link.

The main thing to remember about gold is that it's not an investment offering growth or profit.  It's purely and simply a store of value:  "an asset, commodity, or currency that maintains its value without depreciating".  The US dollar used to be regarded in that light - but no longer.  With the value of the dollar depreciating, and the Federal Reserve's money-printing machine making that worse by the day, there's a real risk that the dollar may lose its status as the world's reserve currency, just as its predecessors have done in the past.  (Click the graphic for a larger view.)

If that happens, the Chinese renminbi is waiting in the wings, ready, willing and able to take over in an economic heartbeat.  That will spell very serious, multi-generational economic hardship for this country, as US debt (i.e. Treasury bonds, etc.) will no longer attract anything like as much international investment as it once did.  It will make it much harder to finance US government deficit spending, currently subsidized by such investment.

I think the increasing interest in gold by central banks is an indication that they can see this coming.  Don't forget, China is a huge investor in gold;  by some accounts, its public and private reserves have been increasing for at least 15 years.  That doesn't indicate great confidence in the dollar.

(As an aside, note that China and Russia are establishing an alternative to the US-dominated SWIFT international financial transaction clearing system.  This will particularly favor non-US-dollar-denominated trades, which can be cleared completely independently of SWIFT, and will therefore be harder for US financial authorities to track.  It's yet more evidence of the dollar's decline in international importance.)

Secondly, China is investing a huge amount in building up its food reserves - so much so that it's concentrated more than half the world's supply of some food commodities within its borders.

Less than 20% of the world's population has managed to stockpile more than half of the globe's maize and other grains, leading to steep price increases across the planet and dropping more countries into famine.

The hoarding is taking place in China.

. . .

China is maintaining its food stockpiles at a "historically high level," Qin Yuyun, head of grain reserves at the National Food and Strategic Reserves Administration, told reporters in November. "Our wheat stockpiles can meet demand for one and a half years. There is no problem whatsoever about the supply of food."

According to data from the U.S. Department of Agriculture, China is expected to have 69% of the globe's maize reserves in the first half of crop year 2022, 60% of its rice and 51% of its wheat.

The projections represent increases of around 20 percentage points over the past 10 years, and the data clearly shows that China continues to hoard grain.

. . .

Chinese President Xi Jinping keeps stressing the importance of food security. The National People's Congress, China's national legislature, in April adopted a food waste law that bans excessive leftovers. At the end of October, the Chinese Communist Party and the State Council instructed officials on how to reduce food waste.

. . .

Throughout history, food shortages have triggered popular unrest. They served as a contributing factor to uprisings that toppled Chinese dynasties. And the world's second largest economy now faces food uncertainties due to factors such as its deteriorating relations with the U.S. and Australia, which could drastically alter the import environment. In fact, this could be what is prodding China to boost its calorie reserves.

Again, more at the link.

China's food security extends to Chinese firms buying agricultural producers and processors all over the world, including many in the USA (for example, Smithfield, the world's largest pork producer).  The question is, why are other countries not following China's example?  Is it that the rest of the world doesn't see any threat to food security?  I'd have thought that our experience with internal supply chains over the past couple of years would have disabused American consumers about that, but it seems the warning signs are being widely ignored.  (I hope my readers aren't doing so - we've discussed the problem many times in these pages.)

So, to summarize:  China is accumulating greater and greater public and private gold reserves, and it's accumulating massive food reserves.  Connect the dots, and I'd say one or more of three possibilities applies:

  1. China sees worldwide economic trouble coming, and is preparing to withstand it;
  2. China sees a geopolitical (and possibly military) conflict coming with the USA, and is preparing to withstand it;
  3. China is positioning itself to use its fiscal and food reserves as a geopolitical weapon, supporting its allies and depriving its ideological and regional foes of the reserves and supplies they're going to need very badly.
Other central banks are following China's lead by diversifying into gold to an increasing extent, at the expense of the dollar.  Their governments can't afford to stockpile food to the same extent, but I note some countries have restricted exports of key crops (including staple foods) due to the effect of the COVID-19 pandemic on world trade and food supplies.  Those who haven't stockpiled those key crops may find it difficult to buy what they need, but China appears to have side-stepped that problem thanks to its economic strength, which has allowed it to buy almost everything available.

Meanwhile, the USA is not only running short of domestic food supplies, we're continuing to sell our food production to the highest (mostly foreign, mostly Chinese) bidder(s).  Furthermore, we're printing dollars like there's no tomorrow - and nobody knows for sure how much gold is in our reserves, because they've never been publicly and transparently audited.  Do we still have the world's largest gold reserves?  Or have they been sold off, bit by bit, to support the dollar and/or pay our debts to other nations?

Makes you think, doesn't it?



McChuck said...

One nit to pick - The majority of US government debt is now directly owned by the Fed, effectively a branch of the US government. They create electronic money out of nothing, then loan it to the government. This is why the interest rates have remained so low for so long. The government cannot afford to pay interest on 30 trillion dollars.

MrGarabaldi said...

Hey Peter;

After Reading this, I keep drawing parallels to the story in the Bible with the 7 years of plenty and 7 years of famine and wonder if China is planning for that, and becoming the worlds grainbasket and selling back at inflated prices and gathering the worlds wealth and becoming the preeminent superpower for the new century.

Old NFO said...

I'm thinking the third option.

Maniac said...

MrG, you're right. China has been playing the long game for quite a while now and they're going to be much better off than us when the SHTF.

Jonathan H said...

The last I saw, less than $6 trillion of Treasuries are owned by all foreign entities, and at that time, 2 years ago, China and Japan were pretty much tied for largest foreign investor.
Most treasuries are owned by US entities or the Fed; they are considered "safe assets" and financial firms in the US have to have a certain percentage of their portfolio in "safe assets". While there are other options, Treasuries are the most common and most liquid.

Jonathan H said...

It could also be that they are planning something that will isolate them internationally for a while and want to bridge the gap.

LindaG said...

I doubt we have much in gold reserves at all since they stopped backing the dollar with gold years ago.

Fredrick said...

"China's food security extends to Chinese firms buying agricultural producers and processors ..."
What Chinese troops stand by to keep those from being siezed by the USG?

"If that happens, the Chinese renminbi is waiting in the wings, ready, willing and able to take over in an economic heartbeat."
It does? Hasn't the last 50 years of Chinese currency manipulation dissuaded anyone from that?

SiGraybeard said...

I've recently been re-reading a book called "The Death of Money" - copyright 2014, so certainly not written after that - and the author pointed out China was quietly buying up tons of gold back then. They have a massive head start.

The adding of food supplies implies either what MrGarabaldi says about them planning to sell it off when the world food distribution network collapses (could be any day now - if you listen to Michael Yon and lots of others) or they could be planning to hoard it, keep their citizens alive and let the rest of the world starve to death. Considering how they welded doors closed in Wuhan and essentially killed off tens of thousands, that latter one is a bit harder to imagine.

Mind your own business said...

In the event of open hostilities with China, I can't imagine we would not nationalize or confiscate any food producers/processors that the Chinese own in the US, and stop the shipment of food back to Asia. Much as we did with German-owned subsidiaries and the like in the US during WW1 and WW2. For example, there is something to be said for the idea that Dow Chemical got its real start when we invalidated any Bayer patents and processes in WW1. An embargo on China would be very painful for US consumers, but it would eventually create opportunities for US manufacturers and workers.

In other words, we may be forced to do what we've known for a long time was what we ought to do.

China, of course, would do the same, and we could see the real naivete and foolishness of some of the choices made by multinationals who relied on China as their sources. It would be interesting to see an analysis of which companies in the DJIA or S&P500 have the largest percentage of their investments anchored in China, and which have the least.

Xoph said...

Having worked for a multi-national that started in the US but saw the potential of growth outside the US the mentality became that they were NOT an American company, but a company of the world. Such companies, led by American citizens, have not had America's best interests at heart. They have rationalized greed. Our own government aided and abetted.

Look at what we accomplished in WWII - we could turn our manufacturing situation around in <5 years if we had sufficient national will.

Read "Unrestricted Warfare". I did a job in China 3 years back. The Chinese are very upfront about they want to be #1. They will also suck you dry and send you on your way, never to come back. The point is war is just one aspect of competition, there is diplomatic, economic, technological, etc. All must be used in the proper time and place in order to win.

The current shenanigan's are to keep us distracted and demoralized so we don't have an American Renaissance. Our government is an active and enthusiastic accomplice.

The Freeholder said...

China's currency won't be the next reserve currency. Their economy is opaque to the world. Companies are finally learning that investing in China is a lose-win proposition-they lose, China wins. While China will have a (short) time in the sun, I expect it to be like it was with Japan in the 80s-no staying power.

None of this means that the dollar will remain the reserve currency. There will be a new one, and my suspicion is that it will have something to do with either the World Bank or a group of central banks. Probably too much to hope that it would be gold-based.

froginblender said...

CBDC (Central Bank Digital Currency) is what they are pushing so hard. As Fredrick and Freeholder said, the Renminbi will not replace the greenback as the world's reserve currency. There will be a basket of currencies, at least initially.

As with the vax passport ("vaxport"), all part of the Great Reset. Total surveillance, centralized control. You exist at the sufferance of the State.

The Blockchain may yet turn out to be the most ominous invention in history -- worse than the atomic bomb.

Feral Ferret said...

Xoph, that sounds very similar to my last employer. When I started that job eight years ago they were primarily US based with one Canadian, one Mexican, and Brazilian facility. They also had a few facilities in Australia and elsewhere. They merged with an EU (mostly French) company. Then they merged with another company that was big time globalist (GE Transportation), including a large presence in China. Very quickly, the company newsletters and other propaganda started promoting the Chinese side of the business heavily while alienating the EU side. The latter merger also shifted top management personnel to those from the globalist company.

The US employees have gone from valued to treated poorly. I'm glad I left nearly five months ago and retired. They just announced today that all employees have to report their vaccination status by next Monday. They have ruined a once proudly American company. Most of the still unvaccinated employees will NOT submit to the vaccine mandate.

CheezusCrackers said...

We have to embrace our new reality: we, the US, are not the good guys and haven't been for quite a while. And by that i mean if course the regime posing as an elected government. Given the malevolence of these Criminals, i do not want them to have the power to finance anything, so let the dollar crumble, let the Treasury go belly up. Yes, it will be horrendous for the People for a time but better poverty with freedom than surplus in chains.

Billll said...

So does the latest chinese bio weapon attack wheat and corn, which would explain their stockpiling a 2-year supply of grains?

Will said...

I'm wondering if the Chinese food stockpile is within the floodplain of the 3 Gorges dam. Might be a major oopsie if that is the case.

Ray - SoCal said...

Nice chart on countries hold reserves:

I read someplace China and Russia’s are under counted.

And that the price of gold is being held down through financial manipulation.

And that there is a difference between physical vs on paper. The paper gold holdings are easy to manipulate.

LargeMarge said...

A minor sniggle:
"...With the value of the dollar depreciating..."
By definition, fiat currency has zero-zero-zero value.
Said in other words:
* the valueless dollar is more valueless.