Will China’s Silk Road pave the way for gold?

A few years ago, China expressed the ambition to build new trade routes to Europe, so that goods can be transported back and forth faster between the different countries on the Eurasian continent. The Chinese government led by President Xi Jinping set up the new Asian Infrastructure Investment Bank in order to finance the construction of new roads, bridges, railways and pipelines throughout Asia. It is a large and ambitious project, which is now supported by dozens of countries on the Eurasian continent.

The Chinese economy is largely dependent on the export of goods and an increasing part of that export goes to countries on the Eurasian continent. The advantages of a trade route over land is clear, because a goods train can travel to Western Europe in about two weeks, while a container ship takes more than one month to arrive. In addition, a route over land is less vulnerable to bottlenecks such as the Suez Canal in Egypt and the Strait of Malacca near Malaysia.

Center of gravity shifts towards gold

The construction of new trade routes between Europe and China is not only an economic, but also a political project. More economic cooperation on the Eurasian continent probably also means that a large part of the world will use less dollar reserves for trade. In recent years we have already read several reports about currency swaps and countries that want to pay oil and gas in different currencies than the American dollar. Of course, that does not happen from one day to the next, but a clear trend is visible over a longer period of time.

In the last five years, China has added practically no more dollars to its reserves, while Russia reduced its dollar reserves. At the same time, both countries are adding considerable amounts of gold to their reserves, as a result of which the center of gravity on the balance sheets of their central banks is increasingly shifting towards the precious metal. Both countries now have more than 1,800 tonnes of gold in their vaults, while their gold stock was around 400 tons by the turn of the century. European countries have sold a lot of gold since the turn of the century but still have huge reserves in relation to the rest of the world.

Silk road for gold?

Three main economic focus points on the Eurasian continent – Europe, Russia and China – all now have a pro-gold strategy. The ECB and the central banks of China and Russia all value gold today at it’s current market price, in contrast to the United States, which still values the precious metal at the historical rate of $42,22 per troy ounce. That only seems to be an accounting difference, but it says a lot about how different parts of the world look at the value and function of the precious metal.

Recently it was announced that the gold exchange in Hong Kong is holding talks with Singapore, Myanmar and Dubai to promote the trading of gold along the Silk Road. By linking various gold exchanges to each other and recognizing 1 kilo gold bars as a universal standard, it should be even easier to trade the precious metal and physically deliver it to the desired location. The director of the Chinese Gold & Silver Exchange Society expects this new gold corridor to give a strong boost to the demand for the precious metal.

The development of the Silk Road offers opportunities to further reduce dependence on the dollar system, because differences in the balance of payments of participating countries can then be easily accounted for in gold. Do we return to the monetary base of gold, which the French President Charles de Gaulle longed for so eagerly fifty years ago?

This column appeared earlier at Goldrepublic