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While other Currencies Emerge as an Alternative to the US Dollar, Gold will also Benefit.

Precious Metal Investment Expert
July 29, 2014

Last week, the main drivers behind the gold prices were the situation of the Malaysian Airlines jet downing in Ukraine and Israel’s invasion of Gaza. For now it seems that the other hot-spots especially those in Syria, Libya and Iraq have been temporarily forgotten.

On Thursday, gold prices fell on Comex once again, in what was yet another bout of concentrated selling on two occasions. It is estimated that $1 billion worth of gold futures were sold in a matter of seconds on the open of the market. However, despite posting an overall decline for the week, the price of gold rebounded strongly on Friday even though the US dollar gained against most of the other major fiat currencies. At the time of writing, the price of spot gold is trading above $1310 an ounce.

As Western media continue their propaganda regarding current geopolitical tensions, little attention has been paid to some major events that are developing in the global monetary system. And, while the U.S, and the European leaders impose more sanctions on Russia, their very move is prompting Russia to reduce its dependence on the U.S dollar.

Last week, U.S State Department spokeswoman Marie Harf gave the press a truly comical performance. After blaming Russia for the Malaysian air disaster and claiming the U.S. has evidence that Russia intends to deliver powerful rocket systems to pro-Russia rebels in Ukraine, Ms. Harf declined to provide details about the systems or about how that conclusion was reached. And, when questioned by Associated Press journalist Matthew Lee over how the conclusion was reached, she attempted to ignore his questions and instead asked for other questions. But, Lee politely demanded a response.

“Marie, I think that it would be best for all concerned here, if when you make an allegation like that you’re able to back it up with more than just ‘Because I say so,” Mr. Lee said.

Ms. Harf disagreed with the assertion: “That’s not what I said. It’s based on intelligence information. It’s not because I said so.”

Recently, a meeting between the leaders of the BRICS countries resulted in an agreement on a new financial system and currency pool.

BRICS is the acronym for an association of five major emerging national economies. Brazil, Russia, India, China, and South Africa. The grouping was originally known as “BRIC” before the inclusion of South Africa in 2010. The BRICS members are all developing or newly industrialised countries, but they are distinguished by their large, fast-growing economies and significant influence on regional and global affairs; all five are G-20 members.

As of 2013, the five BRICS countries represent almost 3 billion people with a combined nominal GDP of US$16.039 trillion and an estimated US$4 trillion in combined foreign reserves. As of 2014, the BRICS nations represented 18 percent of the world economy.

Brazil is a large country, but it is a relatively poor nation.

While Russia is rich in oil and natural gas, it does not have much else going for it, and its economy is still quite small in comparison to the United States.

Although India has a population of well over 1 billion, it is a relatively poor country, plagued with bureaucratic regulations and a terrible currency. However, it is the second largest importer of gold in the world.

On the other hand, China is fast becoming a force to be reckoned with. The developments that have taken place there in the last 35 years have been astonishing, resulting in one of the greatest gains in wealth in history over such a short time span. Hundreds of millions of people have been lifted out of extreme poverty.

As for South Africa, there is not much to say. While Western leaders applaud the country for its so called democracy, they fail to mention that nation has one of the most corrupt governments in the world and the country is plagued with crime. Armed robberies, housebreaks, hijackings, murder and rape occur on a daily basis. Electricity prices are one of the highest in the world and so is the unemployment rate. Property rights have been weakened there, and the country is quite insignificant in global economic matters. And, South African leaders seem to know nothing about wealth creation and are more intent on the redistribution of wealth instead of the production of wealth. 

Perhaps, South African leaders should take a lesson from Adam Smith who outlined in his book the Wealth of Nations how great empires depend on an educated, productive and prosperous citizenry. Or they should follow the policies of successful countries such as China, Singapore and United Arab Emirates instead of emulating the ideologies of leaders such as Robert Mugabe of Zimbabwe or Hugo Chavez of Venezuela. Nevertheless, what is significant about the BRICS nation is that they have established a new development bank and a reserve fund set up to offset financial crises. 

The BRICS Development Bank – with an initial US$50 billion in capital – will be not only BRICS-oriented, but invest in infrastructure projects and sustainable development on a global scale. The model is the Brazilian BNDES, which supports Brazilian companies investing across Latin America. In a few years, it will reach a financing capacity of up to $350 billion. With extra funding especially from Beijing and Moscow, the new institution could leave the World Bank in the dust.

And then there’s the agreement establishing a $100 billion pool of reserve currencies – the Contingent Reserve Arrangement (CRA), described by Russian Finance Minister Anton Siluanov as “a kind of mini-IMF”. That’s a non-Washington consensus mechanism to counterpunch capital flight. For the pool, China will contribute with $41 billion, Brazil, India and Russia with $18 billion each, and South Africa with $5 billion.

Since its first summit in Ekaterinburg, Russia in June 2009, BRICS has grown into what it is today: an increasingly consolidated geopolitical alliance of powerful countries bent on neither allowing the Western powers to call the shots in today’s world, nor to threaten them. Furthermore, it will not allow the West to impose its currencies, and its debt-based economic philosophy on everybody.

Meanwhile, China continues to develop the yuan into a global currency. Only last month  China's central bank said it plans to designate clearing banks for its currency in Paris and Luxembourg, as the two financial centres battle with London to become the leading European offshore yuan-trading city.

The French and Luxembourg central banks have signed agreements with the PBOC allowing for greater cooperation in the oversight of their domestic yuan market. Also, Singapore and Sydney are also vying for a significant share of the global yuan market, which is expected to expand rapidly along with China's fast-growing economy.

In addition to designating a clearing back in London earlier this month, the PBOC also announced on June 18 that the yuan can now be exchanged directly for British pounds in Shanghai's foreign-exchange market. Previously, traders have had to exchange the currencies through the U.S. dollar, which added to transaction costs.

In 2013, yuan foreign-exchange trading in London reached $25.3 billion a day, up 50% compared with 2012, according to data released earlier this month.

China's currency has become increasingly popular in settling total trade. In the first three months, 18% of China's total trade, or 1.09 trillion yuan, was paid for in yuan, up from 14% in the fourth quarter of last year, according to Bank of China. That compares with just 1% of China's total cross-border trade five years ago.

For the long term, China wants to turn the yuan into a global reserve currency that is used for investment, trade and loans, as are the dollar and euro. A widely accepted yuan could help Chinese companies alleviate foreign-exchange risks. We may even see a gold backed yuan!

The result of these developments will ultimately reduce the hegemony of the US dollar which in turn will lead to a loss of faith in the greenback. But, in addition to this, I expect geopolitical tensions to deteriorate in the coming months. This will prompt Western governments to further debase the major currencies of the world and destroy the wealth of the middle class.

The end game will be an economic collapse and the destruction of our current monetary system. However, countries and individuals that have reduced their dependence on fiat currencies and have followed a policy of sound money that includes holding physical gold will survive this coming crisis.


Gold prices remain above the support level at $1300/oz. as well as the 200 and 50 day MA. Price action looks to be neutral to slightly positive in the short-term.

David Levenstein is a leading expert on investing in precious metals. Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.

His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. The largest gold refinery in the world use his daily and weekly commentaries on gold.

David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.

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The periodic symbol for gold is AU which come from the Latin for gold aurum.
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