Gold changing role as wealth moves East
As Asia’s economic power continues to rise over the next two decades, Julian Phillips says, both gold and the developed world face fundamental shifts.
Posted: Monday , 25 Feb 2013
JOHANNESBURG (Gold Forecaster) -
In the last five years, we have seen the start of the decline of the developed world and the real impact of the economic rise of China on that world. What lies ahead? James Wolfensohn, the ex-president of the World Bank gave a short lecture recently in which he forecasts what the world’s cash flows would be like in 2030:
- For the last century and far more, 80% of the world’s cash flowed to what we know as the developed world where 20% of the people lived. Twenty percent of the cash flow went to the underdeveloped world where 80% of the world’s population lived.
- By 2030 these numbers will have changed dramatically, with 35% of the cash flow of the world going to the developed world and 65% of the world’s cash flow going to the ‘emerging’ world, primarily China and India.
- In addition, he says that there will be 1 billion middle class people in China by 2050 –a figure we had previously put at 300 million. This is more than the total population of the U.S.A. and the Eurozone put together. Worldwide there will be 3 billion people in the middle classes with two thirds of them in Asia.
Think for a moment what this will mean to you individually and the world in which you live. Unless one tries to understand them, we will become a victim of the changes. The ramifications are vast; they become almost impossible to detail in advance. We can forecast principal and principle changes but will almost certainly be wrong in specific details. We then look at the changes that will affect the precious metal worlds, but even here we can only make broad sweeps.
Uncertainty & Instability
We can be absolutely sure that man cannot weather these changes without uncertainty and instability on a scale not seen since the World Wars. This is the first ingredient that we must factor into the future and man’s way of coping.
The fact that the Prime Minister of Britain has taken a huge delegation this week to India shows that the developed world is starting to try to adapt to these coming changes. Britain is even minting gold sovereigns, a coin with emotional connotations in India. But we do not see Asia turning to the developed world as partners in the future. The pattern to date has been to mimic the developed world’s skills, and then do it cheaper at home, exporting the products back to the people who taught them at a lower price! So the wealth and power of the developed world seeps across to the East and will continue to do so until emerging world income rises to the same level as developed world income or developed world income falls to that of the emerging world.
It’s clear that Asia is not an ally of the developed world nor are they committed to helping the developed world. The saying is true that nations have interests, not friends. This will be the case between the two sides of the world. Asia sees its first priority in lifting itself up and using developed world markets to help do that.
The developed world may see only flat growth in the medium-term, reminiscent of the postwar-era when Britain, with its outdated equipment, was quickly overtaken by Japan, where after the war everything was built new, from scratch. Both China and India are in a similar position now. As a result, manufacturing will continue to go east.
As the pressure grows on the developed world, the developed world may be pressured into protectionism to survive. The initiation of the U.S./European Free Trade Zone this month is the start of such survival techniques. Consequently, economic pressures will escalate into tension between East and West in global trade. The arrival of the Yuan onto the global stage will exacerbate these.
Change in the Monetary World
But the direct point of impact of these growing pressures will be in the monetary world. This was highlighted last week in the G-7 and G-20 meetings where quantitative easing was justified and its direct impact on the exchange rates minimized. This attitude directly undermines stability in foreign exchanges and, worse still, makes acceptable the undermining of the foreign exchange rate system itself and the need for currencies to be reliable measures of value. We have no doubt that the self-interested positions that this demonstrates will continue to grow and worsen to the detriment of the global economy. After these statements, we’re seeing sterling continue to fall. Expect to see the Yen fall to 100+ against the USD.
Since the last war, the developed world has interlinked with the U.S. in a tight knit monetary system based on the dollar, the only currency with which to buy oil. With Asia rising and with the Yuan shortly to make its appearance on the global reserve currency table, the dollar will lose a great deal of its control over both oil and the global monetary system. It will retain its hold over O.P.E.C. but not over Russia and if it agrees on a defined trading range between the euro and the dollar will ensure Europe pays for its non-European oil in dollars still. It’s likely, however, that Russian sales of oil and gas to Europe will be made in Rubles or euros, not dollars. Therefore, there will be a loosening of both the U.S. grip over oil supplies and the dollar’s grip over the monetary world.
We cannot see the developed world willingly cooperating with any demands made by rising Asia as this will probably be at the expense of the West’s influence and power over the monetary system.
For instance, in order for Asia to get the voting power it would warrant in line with its rising power, it would likely request that the I.M.F. lower the number of votes needed to pass a resolution from 85% to say, 70% with it getting a similar number of votes as the U.S.
The alternative is to set up an equivalent body to the World Bank and the I.M.F. –a process it has already started.
Overall expect to see the world fragment into a series of blocs with their trading partners reliant on them. This would inevitably lead to more protectionism and monetary fragmentation.
Alongside this and to reinforce the fragmentation and consolidation of self-interest in these groups, another worldwide development will begin. Both these blocs and all the nations left out in the cold will have to turn to Capital and Currency Controls to hold on to their country’s capital. The ‘carry trade’ of borrowers in low interest currencies and lenders into high interest rate nations would be controlled to prevent the probable tsunamis of capital sloshing between the blocs.
The Capital controls that are seen in Iceland at the moment are the consequences of such crises. These will become increasingly common across the world.
But the most life-changing facet of these changes for the developed monetary world will be the damage done to the credibility of the leading currencies, the dollar and the euro. They will lose their current percentages of global reserves, being replaced to some extent by the Yuan and possibly other Asian currencies.
The current weakening of the Yen, Sterling and Swiss Franc are making this point right now. This process has to continue as nations, in the cause of growth, will progressively weaken their currencies and provoke retaliation from the nations who lose their advantage because of such moves.
The process of fragmentation will create currency volatility that undermines confidence in the entire monetary system. The current discussion of a Currency War will morph into a revolution against the corporation we saw in the past and see to a large extent now. We reiterate that this entire process will be exacerbated by the arrival and growth of the Yuan as an increasingly important global reserve currency.
In turn, there will be a rising need for non-national, liquid, internationally acceptable assets that would support global currencies when used internationally. We know of only one at the moment and that is gold.
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