Changes In The Gold Market & The West’s Declining Power

Changes In The Gold Market & The West’s Declining Power

Many nations have recently called for a new multi-polar regime for global governance. The very core of such a notion betokens one thing; namely, the disuse of the US dollar. Not only have Russia and China called for such a “New World Order” but so to have US allies like France, South Korea, Brazil and India. This has major implications for what Washington can do in the world and at home. Washington depends on demand for the US dollar, and that demand is fading. This comes at a time when programs like quantitative easing have resulted in more dollars circulated than ever before. Well, these will be repatriated over the coming decade as nations like China and Russia trade for oil in renminbi or another currency.

This shifting global order is and will be reflected in a multitude of markets, and for the purpose of this essay we will focus on the gold and silver markets mostly because they serve as a nice parallel market to the fiat currencies in use today. When we look at the gold industry, what’s clear? Well, it’s changing, quite dramatically matter as fact. For one, the 117-year old silver fix is no more. What this means exactly is unclear, but what’s for sure is the old way of doing things has broken down. Western powers will likely no longer be the sole decision-maker when it comes to “setting” the price of silver. The silver fix broke down from pressure by governments like Germany’s over suspected rigging of precious metals. I presume the logic goes, “if Libor is rigged, then so could be the precious metals complex.” This seems to me a straightforward notion.

Western people, in particular in the United States, are somewhat clueless when it comes to gold. Demand in places like India, China, the Middle East and many other regions of the world is overwhelming. These are places which have dealt with numerous currency crises and gold appears as an island of stability compared with those nation’s respective currencies. These types of places are proving themselves to be very productive in the gold sector, and they have plans to influence the future of the gold market.

That’s why one of the world’s largest refineries is under construction in Dubai’s desert. It’s to be completed in 2015 and will likely shift the balance of power in the gold industry. This makes sense because most gold demand is in the east anyway, and not in the west, which has heretofore dominated production and refining.  Recent growth in demand for gold, predictably, has come rom the east.

Now, an interesting question to pose is why do some of the fastest growing economies in the world demand gold? You would think the growth conditions there would spur confidence among the citizens? But this simply is not the case. Hyper-inflationary or unrest episodes in many of these countries are too fresh on the minds of the people.

In short, it seems that refining, clearing and buying-and-selling won’t forever be dominated by Europe and the United States.

“Dubai is already a top global centre for gold trading,” Tarek El-Mdaka, chief executive of Kaloti Precious Metals, wich is building the $60 million refinery,  said in an interview. “The refinery is part of the next stage, making Dubai a top centre for physical gold refining and clearing.”

A low tax environment and proximity to China makes Dubai a good candidate as a new gold center. They handle lots of gold already, as $75 billion in gold imports are expected to pass through in 2014, with 40% of the world’s physical gold trade having passed through Dubai in 2013, according to the Dubai Multi Commodities Centre.  Annual capacity for refining is 800 tonnes in Dubai. This barely compares to the 3,000 tonnes refined in Switzerland, which accounts for 50%+ or more of global refining.

The message is clear.

“London needs to be more flexible and recognize the trend,” said Kaloti, whose company also plans to open a gold refinery with an initial annual capacity of 50-75 tonnes in Surinam this August, to tap into business in that region.

Ultimately, this is the same message the US is getting in terms of the US dollar. The US will have to be more flexible and realize the trend.

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