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Most people in the western world assume that China just wants a "seat at the table" and is content to let the United States run the show.
But that isn't the case at all. The truth is that China doesn't just want to compete with the United States. Rather, China actually plans to replace the United States as the dominant economic power on the planet. In fact, China already accounts for more global trade than the United States does.
So what would happen one day if China announced that it was backing the Yuan with gold and that it would no longer be using the U.S. dollar in international trade? It would cause a financial shift so cataclysmic that it is hard to even imagine.
Most of those that write about the "death of the U.S. dollar" usually fail to point out that China is holding a lot of the cards as far as the fate of the dollar is concerned.
China owns about a trillion dollars of our debt, China is the second largest economy on the planet, and nobody uses the dollar in international trade more than China does except for the United States.
Up until now, China has had to use the U.S. dollar in international trade because there has not been an attractive alternative. But a gold-backed Yuan would change all of that very rapidly.
And without a doubt, the Chinese government has already been very busy promoting the use of the Yuan in international trade.
In a recent note, John McCormick of RBS Group stated the following...
For China, having a global reserve currency is not just about economics. It is also about power.
McCormick ended his recent note this way...
Similar sentiments were echoed in a recent article in the Wall Street Journal...
We don't hear much about these sorts of things in the western media, but the convertibility of the Chinese Yuan is a very big deal.
Up until recently, the Yuan was only directly convertible into dollars and yen. But now that is rapidly changing. So far this year, the Chinese government has entered into currency convertibility agreements with Australia and New Zealand.
So instead of having to change Yuan into U.S. dollars to trade with Australia and New Zealand, now China can cut U.S. dollars completely out of the process. But right now there is nothing that really gives the Chinese Yuan a significant competitive edge over the U.S. dollar.
If Chinese authorities truly want the Yuan to end up replacing the U.S. dollar as the primary reserve currency of the planet, they need to do something that will make the rest of the world want to use it. And they could do that by backing the Yuan with gold. In fact, there are persistent rumors that China has been busily preparing for that.
For example, the Economic Policy Journal recently pointed out that Dr. Pippa Malmgren, the President and founder of Principalis Asset Management who once worked in the White House as an adviser to President Bush, is claiming that China has plans to turn the Yuan into "a hard, gold-backed currency" that will have a distinct competitive edge over the rapidly depreciating paper currencies that the rest of the globe is currently using...
Other analysts are also fully convinced that the goal of the Chinese is a gold-backed Yuan.
The following is what money manager Stephen Leeb told King World News recently...
And without a doubt, China has been hoarding massive amounts of gold. Everyone agrees on that. But what nobody knows is exactly how much gold China currently has stockpiled, because China is not telling anybody.
One recent estimate put China's gold reserves at more than 7,000 tons of gold, but it could potentially be far higher than that. When China does finally tell the rest of us how much gold they have, they will probably be just a move or two away from checkmate.
What we do know is that China is importing absolutely enormous amounts of gold right now even though China is also the number one gold producer on the planet.
According to Reuters, more than 223 tons of gold was imported into China from Hong Kong in March. That smashed the previous record of 114 tons in December.
Overall, Chinese imports of gold from Hong Kong tripled in 2012, and the final number for 2013 is going to absolutely smash what we saw in 2012. Obviously something is happening.
China is massively hoarding gold at the same time that it is trying to substantially raise the international influence of the Yuan.
It doesn't take a genius to see where all of this is headed.
If China does decide to back the Yuan with gold and no longer use the U.S. dollar in international trade, it will have devastating effects on the U.S. economy. Demand for the U.S. dollar and U.S. debt would drop like a rock, and prices on the things that we buy every day would soar.
At that point you could forget about cheap gasoline or cheap Chinese imports. Our entire way of life depends on the U.S. dollar being the primary reserve currency of the world and being able to import things very inexpensively. If the rest of the world (led by China) starts to reject the U.S. dollar, it would result in a massive tsunami of currency coming back to our shores and a very painful adjustment in our standard of living.
Today, most U.S. currency is actually used outside of the United States. If someday that changes and we are no longer able to export our inflation that is going to mean big trouble for us.
So keep an eye on China, and look out for any news about the Yuan.
It won't happen next week or next month, but eventually we could see China back the Yuan with gold.
When that happens, it is going to be a complete and utter financial disaster for the United States.
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