The Great Game Accelerates…

December 9, 2013

In the jigsaw that is the Great Game of Asia pieces which heretofore made little sense on their own are beginning to slot in to give us an idea of the final picture. These disparate pieces are as varied as China’s claim of territorial rights over Japan’s Senkaku Islands, NATO’s backing off from Syria, America’s détente with Iran and the surprising move by Iran to improve relations with the other Gulf States. The Chinese yuan is now second only to the US dollar in trade finance, displacing the euro.  George Osborne, UK Chancellor at very short notice recently flew over to China, when there was already a British delegation there. And this week, again at little notice David Cameron flies to China for top level meetings with the new president and the premier, promoted by the British media as a trade mission.

There are also a few gold-coloured pieces in want of a slot in the puzzle. The Arabs are recasting some of their gold into one-kilo bars ahead of the introduction of a spot gold contract on the Dubai Gold and Commodity Exchange in a deliberate move away from LBMA standards. Chinese gold imports are far, far greater than Western analysts acknowledge. Despite accelerating physical demand from the Far East, Western capital markets insist on suppressing the gold price, forcing physical metal to rapidly disappear from Western vaults into the anonymity of Asia.

If we stand back to get an overall impression of how this jigsaw fits together, the guiding hand of China can be imagined throughout. While one can read too much into any big-picture action, things do seem to be working for China. The Senkaku dispute, with its provocative Air Defence Identification Zone looks like a kung-fu feint, designed to throw America off-balance and into defending her alliances with Japan and other long-standing allies. America has ended up wrong-footed over regional policy, hampered by a newly-appointed and inexperienced ambassador in Japan and by the imminent retirement of her ambassador in Beijing. All this detracts America from addressing China’s more important interests. Washington is now belatedly sending high-level envoys to the region, but this will be to no avail.

We must conclude that China’s future interest is no longer with America, which has been her largest trading partner. Her new ambitions are predominantly towards Asia through the Shanghai Cooperation Organisation (SCO), which is an economic bloc she jointly runs with Russia and has ambitions for the whole continent, excluding for the moment only South-East Asia and Japan. The spread of current member states, observers and associates covers more than half the world’s population. This she sees as her home turf with lots to develop. And the most important outstanding strategic objective for China is to do away with the US dollar for Asian cross-border trade, and also eventually with all other trade wherever possible.

This explains why America finds herself parked in a cul-de-sac labelled Senkaku. China is instead turning to London to utilise strong existing links with Hong Kong to develop a yuan alternative for trade finance for her non-Asian trade, which is why Cameron and Co are getting so excited. And even before this move, the financial power behind China’s economic renaissance has been sufficient to knock the euro into third place for trade finance.

We now turn to the Middle East. China’s interest in absorbing the Middle East into her sphere of influence is obvious, given her current and future energy requirements; but she will also want to tap into the enormous wealth in the region. Her link into it is through Iran, an SCO Observer State, to which she provided covert support during the Ahmadinejad years. One can only speculate about the degree of Chinese influence behind Iranian political developments, with Iran now aligning herself with China’s view that trade matters more than belligerence with her perceived enemies. However, if one acknowledges China’s strategic and trade interests, there is a ready explanation behind Iran’s diplomatic moves to heal the rift with Saudi Arabia and other members of the Gulf Cooperation Council.

The great-game strategy for the Middle-East appears to have been to force the US to resign as regional policeman, which has happened in two stages. Initially Russia brokered a deal over Syria, leaving America and her NATO partners completely outflanked. This was followed by a similar move over Iran, guided possibly by China. There will be no leaving party, and the role of American policeman will be replaced by common  peaceful trade interests throughout Asia.

We can begin to see how our jigsaw puzzle might complete. But there is an extra piece for which there is no place, and that is the dollar. It is simply becoming surplus to requirements; and here again China has America cornered. After concluding her alliances with the Middle East she will control directly and indirectly almost all the world’s above-ground stocks of gold, which in the final analysis is more powerful than any fiat currency, reserve status or not.

One can only speculate about how much of this is self-inflicted by the Americans. Was it her overt imperialism that undermined her, or is it the Fed’s monetary policy? I also remember Alan Greenspan’s undiplomatic remarks over China’s stock of US Treasuries, when he pointed out that they had the problem, not America.

That is for post-event analysis, but for now Western markets seem to be unaware of these important developments, leaving the dollar/gold pair more mispriced than perhaps at any point in history. Physical gold is being cornered, leaving Western capital markets operating as little more than casinos backed only by hot air. The dollar will one day be a bit-player in international trade, meaning that enormous quantities are becoming redundant and will have to be sold for something else.

After the inevitable upwards explosion in the dollar price of gold, we shall be left wondering at what price we will need to offer our goods and services to get some of it back from Asia.

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Alasdair Macleod

macleod@financeandeconomics.org

www.financeandeconomics.org

Alasdair became a stockbroker in 1970 and a Member of the London Stock Exchange in 1974. His experience encompasses equity and bond markets, fund management, corporate finance and investment strategy. After 27 years in the City, Alasdair moved to Guernsey. He worked as a consultant at many offshore institutions and was an Executive Director at an offshore bank in Guernsey and Jersey.

It is estimated that the total amount of gold mined up to the end of 2011 is approximately 166,000 tonnes.