• First, I suggest that you get in the habit of recognizing the acronym “SGE” as meaning “Shanghai Gold Exchange”. If you’re interested in gold, you’re going to read a lot about the “SGE” over the next several years.
• Second, ZeroHedge.com reports that,
“China has approached foreign banks and gold producers to participate in a global gold exchange in Shanghai, as the world’s top producer and importer of gold seeks greater influence over pricing and the global gold market.
“The Shanghai Gold Exchange [SGE] got the go ahead from the central bank last week to launch a global trading platform in the city’s pilot free trade [international] zone. SGE is looking to launch physical contracts of gold, silver and platinum group metals denominated in Chinese yuan on the international exchange.”
If the sale of physical gold on the SGE is denominated in Chinese yuan, the world’s interest in the yuan will grow.
As the world begins to turn to the yuan to buy physical gold, it will simultaneously turn away from the fiat dollar. The rising influence of the SGE will tend increased the perceived value of the yuan and diminish the dollar’s perceived value by increasing the rate of inflation.
• Third, according to Reuters,
“China, the world’s biggest buyer of raw materials from copper to coal, is pushing hard to establish pricing benchmarks for a number of commodities.”
The significance of the previous quote is not that China is seeking to establish “benchmarks,” per se, but that China is seeking to establish benchmarks denominated in Chinese yuan. Insofar as the global prices of copper, gold and other commodities are denominated in Chinese yuan, the yuan will become more valuable and the fiat dollar less.
More, insofar as the sale of physical gold becomes concentrated in the SGE, the yuan will become implicitly “backed” by physical gold much like the petro-dollar was implicitly backed by the world’s sales of crude oil.
I.e., from A.D. 1973 to the early 2000s, if you wanted to purchase crude oil on the international market, you had to first have fiat dollars to make the purchase. The resulting global demand for fiat dollars gave those dollars a perceived (but illusory) value.
Similarly, at least relative to the SGE, if you want physical gold, you may soon have to first acquire Chinese yuan. Insofar as you need yuan to purchase physical gold, the yuan will become implicitly backed by physical gold.
• Fourth, referring to the SGE, Reuters wrote:
“Gold, along with oil, could be among the first to be opened up to foreign players. The free trade zone in Shanghai is set to see international energy trading by hosting the country’s first crude oil futures.”
Dayahm!! If the SGE is seeking to sell not only physical gold (which price is currently denominated in fiat dollars) but also crude oil (which price is currently denominated in fiat-petro-dollars), the SGE will constitute a full-frontal attack on the fiat-petro-dollar. Using yuan to purchase crude oil on the international market is evidence of all-out currency war.
Since the fiat dollar’s perceived value is primarily based on whatever remains of its former stature as the world’s only “petro-currency,” it’s possible that the real objective behind the SGE is not to sell gold for yuan so much as to sell crude oil for yuan and thereby cut the legs out from under the petro-dollar. If the petro-dollar depreciates, the US economy will be impaired by greater inflation—perhaps even hyper-inflation.
In any case, the SGE may not only cause the prices of physical gold and physical silver to rise to but also cause the global price of crude oil to rise over the next twelve months.
• Fifth, if the SGE becomes the world’s primary market for physical gold, whatever physical gold is left in the COMEX vaults and other US commodity markets should quickly flee from the relatively low prices for “paper” gold in the US and to the higher prices for physical gold at the SGE.
Implication? If the SGE goes fully “on line” in the 4th quarter of A.D. 2014, US commodity markets might run out of physical gold as early as that quarter and perhaps no later than the 1st or 2nd quarter of A.D. 2015.
All of which suggests that by this time next year: 1) the price of paper gold will fall noticeably; 2) the price of physical gold will rise noticeably; 3) there may be some initial confusion as the prices of physical gold and paper gold diverge—but that confusion shouldn’t last long; 4) the American gold-price rigging scheme (which depends public confidence in paper gold) will collapse; 5) the prices of physical gold and silver (freed from institutionalized price manipulation) will begin to rise dramatically.
• Sixth, and “coincidentally,” the previous predictions should begin within one or two quarters after the London Silver Fix ends this August 14th.
There are plans afoot to replace the current London Silver Fix with some “new and improved” “silver fix” run by new players. However, given the world’s increasing scrutiny of the world’s markets for fixing and even manipulating the prices of gold and silver—and given the world’s increasing inclination to punish manipulation with stiff fines or even prison sentences—I doubt that any coalition of bankers really wants to assume control of, and criminal liability for, running the next “silver fix” after mid-August.
More, there are currently seven different proposals being considered for the “new-and-improved” silver fix. That means that there are seven different “gangs” competing to become the new “silver fix” boss. Seven competitors means there’s no consensus at the current silver fix authority and not even much control. I.e., if the current London Silver Fix had any remaining authority, there’d be only one nominee to assume control—not seven contenders.
Once one of the seven contenders wins the “silver fix sweepstakes,” we can expect the six losing dwarfs to be jealous, resentful and divisive. Thus, it’s unlikely that the next “silver fix” will function as smoothly or with the same degree of loyalty that existed under the previous 117-year-old London Silver Fix institution. You can’t replace an important institution that’s been established for over a century with a new coalition of two or three corporations and expect everything to run smoothly.
More importantly, the reason that the existing silver fix operators are resigning is that they now face serious civil and possibly criminal liabilities for previously manipulating the price of silver. Silver price “fixing” (manipulation) has been an established practice for most of a century. I assume that manipulation depended on conduct that is now deemed to be criminal. If so, the new silver fix won’t simply be operated by a new coalition of banks—it will have to run based on a completely new set operating principles that no longer include the criminal manipulation of prices that previously dominated the London Silver Fix for over 100 years.
That means that the silver fix changeover won’t merely give us new controllers, it will give us new controllers that can’t use criminal procedures to implement that control. The silver fix is not merely changing its bosses, it’s being completely reinvented to establish new, untested, and non-criminal procedures for controlling the price of silver.
What we’re seeing in the silver fix changeover is something like the Boy Scouts being appointed to run a former Mafia cocaine distribution ring. The Boy Scouts will expected to keep on distributing cocaine—but to do so without breaking any laws.
It can’t be done. You can’t distribute an illegal drug without breaking laws. A cocaine distribution ring that’s forced to obey the laws will quickly go out of business and collapse.
Similarly, I doubt that the next silver fix will function effectively if it’s prevented from engaging in criminal manipulation of the market price for silver. Without the use the same criminal procedures that were established, fine-tuned and accepted for over a century, the new silver fix won’t be able to effectively manipulate and control the price of silver.
That’s probably why there are seven different proposals for taking over the silver fix. It’s not just seven different “gangs”. It’s evidence of seven different sets of untested procedures being proposed to replace a 117-year-old London Silver Fix.
If the next silver fix can’t easily engage in criminal activity, it won’t be able to manipulate the price of silver. The next silver fix might be able to hold together for another six months or even a year, but I suspect that the next “silver fix” is already a dead man walking. The prices of physical silver and physical gold may soon be found on free (unmanipulated) markets like the SGE rather than COMEX or the London Bullion Market Association. Once free (or at least “more-free”) markets replace institutionalized manipulation, prices may become more volatile, but should also generally push towards record highs.
In fact, I doubt that there’ll be any agreement on establishing a new silver fix by August 15th. Even if some agreement is reached, I doubt that it will survive for more than six to twelve months.
• Even if a new-and-improved “silver fix” begins on August 15th, the SGE won’t only sell physical gold, but will also sell physical silver, physical platinum and perhaps physical palladium.
Thus, regardless of whether a new “silver fix” is created by August 15th, that “silver fix” will only control the price of “paper-silver” (denominated in fiat dollars or fiat pounds) for just a few months before the SGE begins to sell physical silver for Chinese yuan. The “silver fix” and the SGE will be in indirect competition. One will set the price of paper-silver, the other will set the price of physical-silver.
If so, it’s likely that the prices of paper-silver (declared on the new “silver fix”) will be lower than the price of physical silver found on the SGE. If the SGE pays higher prices for physical silver, much of the world’s supply of physical silver should migrate to the SGE. The lower-priced, paper “silver fix” could soon become irrelevant—perhaps as soon as the fourth quarter of this year. (Who will really care what the prices of paper-gold and paper-silver may be on COMEX, once there’s a legitimate market for establishing the prices of physical gold and silver at SGE?)
As the influence of the “silver fix” diminishes, the price of physical silver should rise even faster while the price of paper silver falls. The price of physical gold will be set in yuan at the SGE. The new silver fix, if it survives, will only translate those prices from yuan to fiat dollars or English pounds. If the SGE provides a substantial market for physical metals, the silver fix for paper-silver will become irrelevant.
As the prices of physical gold and silver become predominant , the fiat dollar used to price paper gold and paper silver will become less needed and therefore less valuable. Again, I’m not predicting that the onset of the SGE will trigger the collapse the fiat dollar, but it will add another straw to that camel’s back. I expect the SGE to contribute to a 2% or 3% increase in inflation in A.D. 2015.
Insofar as the SGE contributes to dollar inflation, the SGE should not only increase the prices of physical gold and silver, but should also indirectly cause an increase in the prices of food and petroleum products denominated in fiat dollars.
• I speculated in an earlier article (“When China Stop Buying Gold”) that, right now, while China is acquiring hundreds of tons of gold (much of which may have been secretly purchased from the US Treasury), China wants low prices for gold so as to more easily acquire more tonnage. But once China determines that it’s purchased virtually all of the world’s “cheap” gold (and the US Treasury’s supply of gold is depleted), China will no longer have an interest in suppressing the price of gold.
If the world’s supply of cheap gold is exhausted and massive purchases of gold are no longer possible, China’s interests may shift from suppressing the price of gold to causing that price to rise. I.e., if China holds the world’s biggest treasury of gold (some suspect China may already have 10,000 to 20,000 tons), like anyone else, China would rather have its gold valued at $5,000 per ounce than at $1,300.
Thus, we can expect the SGE to raise the price of gold, raise the world’s value of the yuan, and inflate/reduce the value of the fiat dollar.
If the previous speculation about China secretly buying the US Treasury’s supply of gold were true, the SGE’s establishment as a global market may signal: 1) the US Treasury’s supply of gold is depleted; 2) China now exerts significant influence over the price of physical gold; 3) the yuan is at least a viable contender for the role of “world reserve currency”; and 4) the fiat dollar’s value is falling.
• Reuters described the SGE:
“State-backed SGE has asked [international] bullion banks such as HSBC , Australia and New Zealand Banking Group (ANZ), Standard Bank, Standard Chartered and Bank of Nova Scotia to take part in the global trading platform . . . .
“China wants to have more voice in gold prices . . . . The international exchange is the first step towards gaining a say in gold pricing.”
“If you don’t allow foreign players to participate in your market actively, or do not push Chinese financial institutions to participate in the international market, then China’s strong gold demand is only a number, not a power . . . .“
“HSBC and Standard Bank declined to comment, while the other banks and SGE were not immediately available for comment.”
If China opens the SGE to international investors, but the world’s major bullion banks decline to participate, the SGE might not get off to a flying start.
Even if the SGE has only one or two small bullion banks participating and those two bullion banks are paying higher prices for physical gold than are paid at COMEX, precious metals will begin to flow to those two small banks and they’ll become fabulously wealthy.
Once the SGE opens as an international market for physical gold, much of the world’s physical gold will flow towards the SGE to take advantage of higher prices. Any bullion bank that refuses to participate in the SGE will become irrelevant and insolvent. The attractive force of the SGE for physical gold should be every bit as irresistible as the repulsive forces of COMEX paper gold.
Once the SGE opens its international doors, the institutions of paper-gold and paper-silver seen on American and London precious metals markets will begin to wither. The manipulations of the prices of physical gold and physical silver previously achieved by means of paper-gold and paper-silver should begin to disappear.
If the “silver fix” dies (or at least withers) in the third quarter of this year, and the SGE opens internationally in the 4th quarter, by this time next year, the prices of physical gold and physical silver could be 30% higher, maybe more, than they are today.
Between the dying silver fix and the full onset of the SGE, we may be on the verge of one of history’s most explosive year-to-year increases in the prices of physical gold and silver.