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Chris Hamilton: China Likely Bought 10,000 tons of Gold…and if They Did, Here’s Why – Biderman’s Money Blog

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Chris Hamilton: China Likely Bought 10,000 tons of Gold…and if They Did, Here’s Why – Biderman's Money Blog.
Gold has long represented the primary means of rebalancing trade surplus / deficits between nations. As a nation ran a trade surplus with another, the exporter ended up with an excess of the importer nations currency. The primary means to rebalance was for the exporter to transfer back to the importer nation it’s currency in exchange for gold. If this continued, the importing nations falling gold holdings would represent a weakening currency…which would mean higher prices to the importing nation and less purchasing of the exporting nations goods slowing down the trade imbalance. Since the advent of paper money until 1971, this had been the general method to rebalance. The US assumed the role of global reserve currency formally at the Bretton Woods conference just prior to the culmination of WWII. The agreement entailed the US dollar would be the “peg” to which all other currencies would maintain their value within a +/-1% band. This was the resolution of what had been lacking between the two world wars: a system of international payments that would allow trade to be conducted without fear of sudden currency depreciation or wild fluctuations in exchange rates. And of course, nations accumulating excess US dollars would be allowed to freely exchange them with the US for gold. And so it was from 1945 through 1971. The US had amassed 20k+ tons of gold following WWII as the primary exporter during the war but by 1971 the growing surplus of dollars sent abroad (initiated primarily under Johnsons’ Vietnam war and the creation of unfunded liabilities) had been increasingly exchanged for US gold holdings. The 20k+ US tons of gold were down to 8k+ tons and falling precipitously. Nixon subsequently closed the gold window and ended the basis of post war monetary rebalancing. In the place of the Bretton Woods system of balance, Nixon initiated the Petro-Dollar system with Saudi Arabia and eventually all OPEC members. The Petro-Dollar would ensure all oil would be paid for in dollars (no matter the purchasing nations’ currency or preference) and the US would make available weapons and “protection” for those oil exporting nations that maintained the Petro-Dollar. The Petro-Dollar would allow the US to maintain large trade and budget deficits without the expected inflationary impacts in the US or significant dollar weakness. All the excess dollars would need be soaked up and utilized by all oil importing nations as foreign exchange working capital.
– See more at: http://charlesbiderman.com/2014/10/29/china-likely-bought-10000-tons-of-gold-and-if-they-did-heres-why/#sthash.MIfQQO7n.dpuf

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