In a recent interview, Stephen Leeb, founder of the Leeb Group, discussed what he believes are China’s plans to buy more gold and make the yuan the world’s reserve currency.
Leeb said that although gold is declining, “People that see what’s happening in the world, especially the Chinese, are getting a lot more serious about” gold. They are, he said, “Determined to get gold, [and are] in a hurry to get gold.”
Xi Jinping, the General Secretary of the Central Committee, and Premier Li Kequiang, Leeb said, “Have done a remarkable job.” Although they have only been in power less than two years, they have “really addressed [corruption] and attacked it.” They “have really made China a much better place to do business….You don’t have to worry about someone coming along with a bigger bribe” anymore.
Leeb also pointed out that “Two years ago, everyone was saying China was in the midst of this massive real estate bubble that was going to crash the economy. Well, the bubble has deflated and the economy is still growing at 7.5%.”
For the future, Leeb said, “All China wants to do…is to control their fate.” They are setting up free trade zones in which gold is being traded in yuan. Soon, Leeb said, “gold is going to be traded worldwide in yuan….That’s the way the world is going.”
Why are the Chinese focused on gold? Leeb said, “In order for the Chinese to feel secure in what they are doing, they have to feel that they have control of their monetary policy….One way to do that is to…denominate their currency or at least make it partially exchangeable for gold.” If the Chinese make the yuan convertible to gold, he said, “It makes their currency the leading candidate for reserve currency status.”
Leeb believes gold will test lows at $1,180 and may put in a double or triple bottom, and then “will just blast off.” He said gold may fall to $1,175, with “people jumping out of windows, and then the next thing you know you are truly off to the races.”
Leeb believes the partial recovery in the United States will push gold lower, and push the Chinese more into the market.
“They’re thinking for the next ten years,” Leeb said. “One vital tool for controlling your economic destiny is if you have the reserve currency.” One way, he argued, to speed up the transition to the yuan as the global reserve currency is to make the yuan exchangeable for gold. If a state in Middle East is selling oil, they will be far more likely to want to exchange it for a currency tied to gold than to a currency that can be printed. “Sovereigns in the Middle East,” Leeb said, “love gold….When they see what the US is doing, they love it even more.”
Leeb argued that most people do not realize how important it is that Russia and China aren’t trading in dollars. “They are trading in rubles and yuan.” China is setting up a new future that will not be based on the US dollar. He predicts that Germany, if something happens in the Euro zone, or Japan, whose leader is having an unconditional meeting with Chinese leaders, “will be first to throw in the towel and drop the US dollar as a reserve currency and start trading in yuan.”
China is already making closer ties with Germany, Japan and India. China is investing heavily in Indian infrastructure. China has the money to invest, while the US “has nothing to give.”
The key, Leeb argued, is to “control the monetary levers….One way to control those monetary levers is to have your currency the top of the heap….China is ready to take a very, very big step in that direction.” He believes China will bid for more gold. “We are getting closer and closer to what is going to make past bull markets in gold look very, very tame.”
Leeb said, “China is the key here.” China wants control of its destiny and the only way to control their destiny is to have the reserve currency, and only way to do that is to tie the yuan to gold. Leeb said, “You have to own this metal.”
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