Gold, Silver, and the New Opium Wars

Watching the global currency markets right now is like watching a horse race nobody wants to win. The closer a currency gets to the lead (world’s strongest) the more its jockey (the central bank) does to slow it down. Some of the horses have been run into the ground. And as we come down the home stretch of the competitive currency devaluation sweepstakes, it wouldn’t surprise if one of the jockeys took out a shotgun and blasted his mount away.

Case in point is yesterday’s intervention by Japanese Finance Minister, Jun Azumi. The yen has indirectly benefitted from the weak euro and chronically sick US dollar. But “benefitted” is the wrong word in our bizzaro currency universe. In this universe, strength is weakness and weakness is strength.

A strong yen makes Japanese exports more expensive. Japan’s whole trade and economic strategy is based on strong exports. It wants to make things everyone else buys. The stronger the yen, the weaker the strategy.

But because the yen is NOT the dollar or the euro, and because it has been favoured by speculators, it is relatively stronger than the other two reserve currencies. And because interest rates in Japan are terminally low, speculators love to borrow in Japan and invest in riskier, higher-yielding assets abroad.

That’s what made yesterday’s yen intervention in the market so puzzling. The gold price in yen instantly spiked by three per cent, as you can see from the chart below. But then all of the things that should have happened next did not happen. Risk assets like the Aussise dollar, copper, and Aussie stocks did not rally, they sold off. What gives? More after the break.

Gold in Yen Soars on Japanese Intervention

24h spot gold in Japanese Yen vs US dollars

Why has the yen weakened against the US dollar and gold, but failed to spark a rally in risk assets? We reckon it’s for this reason: traders realise the yen is the last fiat emperor standing. The fact that the Japanese are now ready to attack their own currency is not bullish for other assets. It’s bearish for everything. It represents a profound escalation in the world’s currency wars, with no neutral assets in which to hide (except gold).

Finance Minister Azumi announced the intervention during market trading. He told reporters…

I’ve repeatedly said that we’ll take bold action against speculative moves in the market. But unfortunately, we’ve continued to see one-side speculative moves that don’t reflect the economic fundamentals of our economy. That’s why I ordered intervention at 10:25 a.m. local time…I’ll continue to intervene until I am satisfied.

“Until I am satisfied?” What does that mean? And have you ever heard a finance minister say that a strong currency doesn’t “reflect the fundamentals of our economy?” These are unusual times.

Normally we’d back the speculators over the Finance Minister. But in a fiat money world, a central bank can flood the markets with infinite amounts of new money to suppress a currency’s appreciation. Are the Japanese really willing to do this? And does it really matter?

Aren’t traders and investors now realising that central banks are hell bent on inflation and currency devaluation? This is a game no one can win. But the moves certainly are confusing.

For example, the yen is down against the USD and AUD. But the move to sell yen has sent the greenback up against the yen, gold, and the Aussie dollar. This is reminiscent of the 2008 “risk off” trade when bad news drove everyone into US dollars and out of everything else.

You can see on the chart below that the AUD/JPY pair closely tracks the All Ords. As the Aussie rises against the yen (the black line goes up) Aussie stocks go up. Murray has been following this relationship for several years in Slipstream Trader. But if the black line goes up while the red line goes down – if the yen weakens but Aussie stocks don’t rally – then something different is now happening in the market with this relationship.

Click here to enlarge

We’ll ask Murray about it and get back to you. In the meantime, yesterday we jokingly wrote about Europe’s trophy assets being for sale during this week’s G-20 meeting in Cannes. Why would the Chinese buy European government bonds now that the Europeans have effectively invalidated the default insurance on those bonds through their actions on Greece?

Wouldn’t the Chinese rather have a giant, stonking, gold coin instead? Maybe like the one below that’s recently been minted by the Perth Mint? Check out that beauty! It has a diameter of 80 centimetres and is 12 centimetres thick. It weighs nearly one tonne and has a market value of $50 million.

China is going to need bigger pockets

gold coin

Source: The Perth Mint

Just think! With $3.2 trillion dollars in foreign exchange reserves, the Chinese could afford to buy 64,000 of those coins! But they will probably need bigger pockets.

Finally, below you’ll find a continuation of yesterday’s discussion of China, Europe, Silver, and the Opium Wars. It was written by Dr. Antal Fekete. We had the pleasure of meeting Dr. Fekete two years ago the first Gold Symposium in Canberra.

Dr. Fekete won’t be at this year’s gathering, unfortunately. But that shouldn’t stop you from coming! It’s November 14th and 15th at Luna Park in Sydney. Your editor will be there to talk about fair money and social justice. And Money Morning editor Kris Sayce is hosting day two of the show.

If you want to understand what’s happening in the currency markets and in the financial markets, the Gold Symposium is a great place to start. And if you’ve already started it’s a great place to continue your thinking, get new ideas, and talk to people who are working on the same problems. We look forward to seeing you there.

Dan Denning
for Markets and Money


Gold Symposium


Silver and Opium
February, 2011 – by Antal Fekete

Dr. Antal Fekete

The opium wars do not belong to the glorious episodes of Western history. Rather, they were instances of shameful behaviour the West still has not lived down. Mercantilist governments resented the perpetual drain of silver from West to East in payment for Oriental goods (tea, silk, porcelain) that were in high demand in the Occident, facing low demand in the Orient for Occidental goods. From the mid-17th century more than 9 billion Troy ounces or 290 thousand metric tons of silver was absorbed by China from European countries in exchange for Chinese goods.

The British introduced opium along with tobacco as an export item to China in order to reduce their trade deficit. Under the disguise of free trade, the British, the Spanish and the French with the tacit approval of the Americans continued sending their contraband to China through legitimate as well as illegitimate trade channels even after the Chinese dynasty put an embargo on opium imports. Because of its strong appeal to the Chinese masses, and because of its highly addictive nature, opium appeared to be the ideal solution to the West’s trade problem. And, indeed, the flow of silver was first stopped, and then reversed. China was forced to pay silver for her addiction to opium smoking that was artificially induced by the pusher: the British.

Thus silver was replaced by opium as the mainstay of Western exports. In 1729 China, recognizing the growing problem of addiction and the debilitating and mind-corrupting nature of the drug, prohibited the sale and smoking of opium; allowing only a small quota of imports for medicinal purposes. The British defied the embargo and ban on opium trade, and encouraged smuggling. As a result, British exports of opium to China grew from an estimated 15 tons to 75 by 1773. This increased further to 900 tons by 1820; and to 1400 tons annually by 1838 – an almost 100-fold increase in 100 years.

Something had to be done. The Chinese government introduced death penalty for drug trafficking, and put British processing and distributing facilities on Chinese soil under siege. Chinese troops boarded British ships in international waters carrying opium to Chinese ports and destroyed their cargo, in addition to the destruction of opium found on Chinese territory. The British accused the Chinese of destroying British property, and sent a large British-Indian army to China in order to exact punishment.

British military superiority was clearly evident in the armed conflict. British warships wreaked havoc on coastal towns. After taking Canton the British sailed up the Yangtze River. They grabbed the tax barges, inflicting a devastating blow on the Chinese as imperial revenues were impossible to collect. In 1842 China sued for peace that was concluded in Nanking and ratified the following year. In the treaty China was forced to pay an indemnity to Britain, open four port cities where British subjects were given extraterritorial privileges, and cede Hong Kong to Britain. In 1844 the United States and France signed similar treaties with China.

These humiliating treaties were criticized in the House of Commons by William E. Gladstone, who later served as Prime Minister. He was wondering “whether there had ever been a war more unjust in its origin, a war more calculated to cover Britain with permanent disgrace.” The Foreign Secretary, Lord Palmerston replied that nobody believed that the Chinese government’s motive was “the promotion of good moral habits”, or that the war was fought to stem China’s balance of trade deficit. The American president John Quincy Adams chimed in during the debate by suggesting that opium was a “mere incident”.

According to him “the cause of the war was the arrogant and insupportable pretensions of China that she would hold commercial intercourse with the rest of mankind not upon terms of equal reciprocity, but upon the insulting and degrading forms of the relations between lord and vassal.” These words are echoed, 160 years later, by president Obama’s recent disdainful pronouncements to the effect that China’s exchange-rate policy is unacceptable to the rest of mankind as it pretends that China’s currency is that of the lord, and everybody else’s is that of the vassal.

The peace of Nanking did not last. The Chinese searched a suspicious ship, and the British answered by putting the port city of Canton under siege in 1856, occupying it in 1857. The French also entered the fray. British troops were approaching Beijing and set on to destroy the Summer Palace. China again was forced to sue for peace. In the peace treaty of Tianjin China yielded to the demand to create ten new port cities, and granted foreigners free passage throughout the country. It also agreed to pay an indemnity of five million ounces of silver: three million to Britain and two million to France.

This deliberate humiliation of China by the Western powers contributed greatly to the loosening and ultimate snapping of the internal coherence of the Qing Dynasty, leading to the Taiping Rebellion (1850-1864), the Boxer Uprising (1899-1901) and, ultimately, to the downfall of the Qing Dynasty in 1912.

The present trade dispute between the U.S. and China is reminiscent of the background to the two Opium Wars. Once more, the issue is the humiliation and plunder of China as a “thank you” for China’s favour of having provided consumer goods for which the West was unable to pay in terms of Western goods suitable for Chinese consumption. The only difference is the absence of opium in the dispute.

Oops, I take it back. The role of opium in the current dispute is played by paper. Paper dollars, to be precise. In 1971 an atrocity was made that I call the Nixon-Friedman conspiracy. To cover up the shame and disgrace of the default of the U.S. on its international gold obligations, Milton Friedman (following an earlier failed attempt of John M. Keynes) concocted a spurious and idiotic theory of floating exchange rates. It suggests that falling foreign exchange value of the domestic currency makes it stronger when in actual fact the opposite is true: it is made weaker as the terms of trade of the devaluing country deteriorates and that of its trading partners improves.

Nixon was quick to embrace the false theory of Friedman. No public debate of the plan was permitted then, or ever after. Under the new dispensation the irredeemable dollar was to play the role of the ultimate extinguisher of debt, a preposterous idea. The scheme was imposed on the world under duress as part of the “new millennium”, shaking off the “tyranny of gold”, that “barbarous relic”, the last remnant of superstition, the only remaining “anachronism of the Modern Age”. The ploy was played up and celebrated as a great scientific breakthrough, making it possible for man to shape his own destiny rationally, free of superstition, for the first time ever. Yet all it was a cheap trick to elevate the dishonoured paper of an insolvent banker (the U.S.) from scum to the holy of holies: international currency. The fact that fiat paper money has a history of 100 percent mortality was neatly side-stepped. Any questioning of the wisdom of experimenting with is in spite of logic and historical evidence was declared foggy-bottom reactionary thinking.

The amazing thing about this episode of the history of human folly was the ease with which it could be pushed down the throat of the rest of the world, including those nations that were directly hurt by it, such as the ones running a trade surplus with the U.S. Their savings went up in smoke. The explanation for this self-destructing behaviour is the addictive, debilitating and mind-corrosive nature of paper money, in direct analogy with that of opium. The high caused by administering the opium pipe to the patient (read: administering QE) had to be repeated when the effect faded by a fresh administration of more opium (read: more QE2).

If the patient resists, like China did in 1840, then a holy opium war must be declared on it in the name of the right of others to free trade. 170 years later a New China once more demurred against the paper-torture treatment it was subjected to by the American debt-mongers and opium pushers.

But beware: if the West starts another Opium War, this time it is not China that will be on the losing side.

Dr. Antal Fekete was born in Budapest, Hungary in 1932 and graduated from the Eötvös Loránd University of Budapest in mathematics in 1955. In 1956 Fekete emigrated to Canada, where he was appointed Assistant Professor at Memorial University of Newfoundland in 1958.

During this period Professor Fekete also had tours of duty as a visiting professor at Columbia University in the city of New York (1961), Trinity College, Dublin, Ireland (1964), Acadia University, Wolfville, Nova Scotia (1970), Princeton University, New Jersey (1974). Since 2005 Dr. Fekete has been Professor at Large of Intermountain Institute for Science and Applied Mathematics (IISAM) in Missoula, Montana.

After retirement from active teaching duties in 1995, Professor Antal Fekete became Resident Fellow at the Foundation for Economic Education (FEE) in Irvington-on-Hudson, New York.

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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4 Comments on "Gold, Silver, and the New Opium Wars"

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Chris in IT
No, China could not afford 64,000 1 ton coins. You dump a few trillion in the physical gold market and you’ll find you’ll not get past the high hundreds tops before the flow dries up. Stock does NOT come online as demand rises, in fact as demand rises (increasing price) the stock becomes more valuable to hold, further reducing flow. The Chinese can’t buy much more old than they already are… there has to be a seller for every buyer remember! Those foreign reserves are mostly a fiction as they cannot be spent (much). I see the chinese using the… Read more »

Might is Right!
As long as you can can use force to back up your claim that, that paper dollar is worth something you should be allright.


The Chinese aren’t stupid.

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