Expect More Chaos Before New Monetary System Is Introduced

November 21 (King World News) – Dr. Stephen Leeb:

The Imminent New Monetary System 

We’ve been watching and waiting for the transition to a new reserve currency linked to gold, a transition that will be manna for gold investors. But it’s neither surprising nor concerning that it’s not happening overnight. Megalithic transitions such as introducing a new monetary system takes time.

Water Never Boils When You’re Watching The Kettle…

Increasingly, the global ‘economic’ pot is getting close to a boiling point. For instance, most commodities from copper to oil now trade in yuan and are implicitly backed by gold. China’s Belt and Road Initiative (BRI) continues apace despite all the sniping leveled against it. After seven years in which China laid the groundwork to introduce the first central bank digital currency (CBDC), within months the paper yuan will be largely replaced by a digital version, at least for intra-China commerce.

That will be followed by use of the digital yuan in international transactions, especially among BRI countries, as subsequent events likely accelerate the process. Most significant is that the Society for Worldwide Interbank Financial Telecommunication (SWIFT) has partnered with China’s central bank in a venture that will involve international trading of the Chinese CBDC. 

SWIFT is the backbone of the financial infrastructure for the dollar-based international trading system. China needs SWIFT to help it broaden its reach beyond BRI countries. And SWIFT needs China with its multiyear edge in the digital technology that will underlie the new monetary system. A digital currency will greatly facilitate and sharply reduce costs and capital needed for international transactions. It will largely take over the dollar’s role, elevating gold in the process.

Gold Is Going To Gain The Most

In short, the inevitability of a fully boiling pot will become clear in the not-too-distant future. But because it’s not happening overnight, I worry that some frustrated investors may give up on gold. That would be a mistake. The most tumultuous part of the transition is coming up next, and gold will be the investment to gain the most – indeed, perhaps the only investment to gain at all.

China has been amassing all the tools it needs to lead the way to a new monetary system. One is military strength. In today’s world, military power rests more on mastery of digital technology than on brute force. To the extent that we’re in a Cold War with China, it’s all about technology.

China’s Lead In 5G Telecom

China has been open in its ambition to at least match the U.S. in leading technologies. The trade war and multiple sanctions placed on China have aimed to prevent China from succeeding. Huawei was a focus, and Huawei may have lost its once-commanding lead in smartphones. But Huawei is one example of how China plays its cards close to the vest. Yes, Huawei has lost ground in the smartphone business and some ground in 5G telecommunications equipment, where it still, however, remains the world leader. But the untold story is that the ground lost by Huawei has been made up and then some by other Chinese companies.

Expect More Chaos Before New Monetary System Is Introduced

Huawei and China-based ZTE together currently account for more than 40% of the equipment market vs. about 30% in 2018. No other country has more than 15%. In the smartphone market, Apple is the clear company leader with about a 28% share of 5G phones.

KEY NOTE: If you look at countries rather than companies, a collection of Chinese companies led by Xiaomi, Vivo, and OPPO have more than 50% of the market, with much more room to grow than Apple since only a relatively small fraction of their phones are 5G-ready, compared to nearly all for Apple’s offerings.

If this surprises you, it may be because no one is trumpeting it. Certainly not China and definitely not U.S. outlets. I acquired the data from The Wall Street Journal (in some cases extrapolating from its charts) and I found it almost amusing how the WSJ’s presentation downplayed China’s lead. One of its charts projects out to 2026 and appears to show the U.S. gaining a strong lead over China in 5G subscriptions – which at first glance I found both surprising and gratifying.

Then I realized it showed per-capita subscriptions. By 2026, the U.S. is estimated to have 93% of the smartphone market vs. 63% for China. However, the kicker here is when these stats are adjusted for population, China will have three times as many subscriptions as the U.S.

China’s Evolving Quantum Tech

Then there are cyber technologies, where China, according to the former head of the Pentagon’s software research, has a multiyear lead. This adds up to Chinese cities with significant advantages in evolving technologies such as the Internet of Things (IOT) and the Industrial Internet of Things (IIOT).

Chinese technology started to really impress me when I saw the stunning progress China has made in high-performance computing (HPC). For several years it had the fastest computer in the world. Then, in the most recent surveys it was overtaken with Japan in first place and the U.S. in second and third place. Overall, in terms of the entire list of 500 HPC computers, the U.S. and China are about even. But it turns out that the latest list omits something important.

China has been hiding that it‘s the first country to produce an exascale computer.

An “exa” what…?!

Exascale computing refers to computing systems capable of calculating at least 10¹⁸ floating point operations per second.

Computers today are all petascale.

“EXA” > 1,000x’s “PETA”

Not only has China been first to achieve exa computing, it has at least two exa computers and appears to be working on others. I’m sure that both the U.S. and Japan will also manage to crack the exa barrier, but China appears to have a jump on the exa industry.

I learned of China’s success in HPC via a peer-reviewed journal reporting that China had leapfrogged others in quantum computer technology. Validating these results required exascale computing.

Expect More Chaos Before New Monetary System Is Introduced
Exascale Vs. Quantum Computing

Incidentally, the quantum results are very impressive. They point the way towards more flexible quantum computation than previously demonstrated. Still, while most experts believe that quantum computers someday could be a game changer, that day is a long way off. But clearly China has a head start.

But the real headline should have been China’s exascale computer, which in a core sense is one definition of high technology. That seems especially true of China’s computer in that it can be programmed for multiple tasks. Only after further probing did it become clear to me that China has more than one exascale computer.

An interesting question is why China hid its success.

One reason, I think, was to avoid being seen as chest-thumping. And second, critical parts of the computer were designed in China. That means either that China’s manufacturing capabilities are several years ahead of what’s known, which is unlikely, or that a company in another country manufactured the parts. There are only two candidates: Taiwan Semiconductor or Samsung, with Taiwan Semi by a pretty large margin the better company and likelier candidate…

This makes China’s success in HPC important for at least two additional reasons. First, it demonstrates China’s technological prowess. Second, it shows the weakness of U.S. sanctions. I always thought that threatening Taiwan Semi with sanctions was showmanship at best. Without Taiwan Semi, after all, there’d be no Apple iPhone.

I don’t foresee China as ready to take over Taiwan but recently- China put the United States on notice that if we recognize Taiwan as a county- they may move in with force.

The Chinese are clearly using the power of economic leverage, leaving Taiwan hanging in the balance. If the United States chooses to give Taiwan status as a country- the United States will be punished via economic implosion. The U.S. technology sector desperately needs Taiwan for semiconductors and many tech-related components. If China moves into Taiwan by force, the U.S. technology sector may see a multiyear setback.

China’s Digital Currency Will Be Backed By Gold

The bottom line is that China has the tools to flagship a new monetary system. It’s one that I expect will center on a digital basket of currencies backed by gold – but in which, in contrast to previous gold-based systems, gold’s price will be allowed to float. 

And as I’ve said before, this could end up being a blessing for the U.S.

I see China’s goal as being an inclusive system that will allow other countries to participate without compromising their sovereignty. For the United States, it should give us desperately needed monetary discipline that will restore our creative mojo, which suffered once we left the gold standard back in 1971.

Expect More Chaos Before New Monetary System Introduced

Shorter term, though, it’s likely to take an eruption of highly unpleasant economic tumult in the U.S. to serve as the final trigger to transition to the new monetary system. While the dollar has been strong – one reason gold has been struggling over the past 12 months – the dollar’s gains are out of whack with reality.

For example, because of ballooning debt, real interest rates have reached record lows and are deeply negative. Indeed, they are more negative than European rates, even though Europe has negative nominal yields. And despite the rising dollar – which makes commodities relatively more affordable here than in other major economies – we still have inflation that’s higher than in other major economies. The whole situation is anomalous and can’t last.

The most likely catalyst for change will be the energy crunch. Evidence continues to mount that oil supplies going forward won’t match demand. A much tighter FED could bring down oil and other commodities, but that could be a punch in the gut to the U.S. economy. It would be highly painful but ultimately would get the world on a better track. I hope there’s another pathway to the same end, but the odds aren’t great.

The Takeaway: Don’t bail out on gold or get rattled by any short-term volatility. Instead welcome it. Whatever happens in the shorter term will be virtually invisible in any long-term chart of the metal’s exponential rise.