The Upside of a Yuan-Gold Peg

Wed, Aug 1, 2018 - 11:18am

So far, all we've seen is downside and negatives from the apparent linkage of the CNYUSD and Comex gold. Could there be a positive resolution by the time this all finally plays out?

Since there's no change and seemingly no end in sight...

...let's try a little thought experiment today.

First, let's make some assumptions:

  1. The yuan-gold peg is real and it's being driven directly by the PBOC.
  2. The US-China trade war worsens to the point where Trump places some level of tariff on all Chinese imports.
  3. The PBOC responds by devaluing the CNYUSD by as much as it deems necessary...let's say 30% total.

What would be the impact on the price of Comex Digital Gold? Well, since late April, the CNYUSD is down 8% while CDG is down about 11%. See below:

IF this relationship/ratio were to continue all the way down to CNYUSD down 32%, would Comex gold fall 44% from it's April level? If so, that would place price near 0. Yikes! Holy crap!! Where's the Tylenol!?!

But stick with me on this...

In 2015, price very clearly found a "physical floor" near 50 gold and silver. It was near these levels when it appeared that the LBMA was breaking (recall the massively record-breaking negative GOFO rates, the LBMA vaults were empty (recall Ken Hoffman of Bloomberg in 2013) and the HUI bottomed near 100 (as prices fell below many miners cost of production).

Thus, the conclusion at the time was that the paper price was allowed to rally in order to maintain the connection between paper and physical. Any further price decline was a risk to the entire Comex/LBMA digital derivative and fractional reserve system.

Fast forward to today.

If we work under the three assumptions laid out above, do you think the Chinese/PBOC give a rat's ass about physical floors, mining costs and the LBMA? The answer is not only "no" but "fuck no". Under this scenario, the Chinese ONLY care about the competitiveness of the yuan and maintaining a CNYUSD devaluation commensurate with the trade wars and tariffs.

Well, given that the All-In-Sustaining-Costs (AISC) have only risen since 2015 and given that major miners are already suffering and posting losses at 00 gold, how many mining companies might be forced out of business at 0 gold? Not only that, how would a significant drop in physical supply affect the physical market?? And if the physical market tightens past the levels of late 2015 and gets significantly worse, what will be the impact on the LBMA???

And so you see, this is where it could all get VERY interesting. IF China is intent upon driving commodity prices as low as required by the falling yuan, the distortions already inherent to the fraudulent Comex/LBMA scheme should worsen to levels which would make the system crack and crumble. AND THIS IS WHAT WE'VE ALL BEEN WAITING FOR!

How many times have we written about the day when delivery failures take down the Comex and LBMA? How many times have we spoken of the unsustainability of the current pricing scheme and the game of musical chairs of alleged physical ownership where there are more than 100 claims on every available, physical ounce?

Well, what would a paper price of 0 do to The Banks who would be on the hook to physically deliver gold at that price...at a time where the vaults are empty, unallocated accounts are unfunded and mine supply is dwindling?

And there you go. Finally, what we've all been waiting for. Total destruction of the NY/London Digital Gold Pool. And maybe this is all part of the master Chinese plan after all? Accumulate physical gold and then force a global reset in price that revalues your gold reserves (which you finally reveal to be 10X what you've stated in the past) multiple times higher. This also "revalues" your existing mountain of debt, it revives your currency by making it stronger and it allows you to ultimately offer some sort of reserve currency option against the US$.

Do you remember this from a few years back?

I know that may sound like some sort of pipe dream and a stretch...but...again...given what we know...and given the three assumptions above...why couldn't things unfold in this manner in the months ahead?

Just some food for thought on a Wednesday.

TF

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