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?

Peter