The U.S. has been backed into a narrow corner by several recent, and widely overlooked, geopolitical events. They have left us in an increasingly dire position and made it plainer than ever that if we don’t adjust our policies to better realign with the powerhouse countries of the new era, the impact on the U.S. in coming years could be catastrophic. The world is racing ahead, and we need to decide if we can afford to be left behind.
One event was the meeting in early September of the Shanghai Cooperation Organization, a Global South body whose members include Russia, China, and Central Asian states. Making this year’s gathering particularly significant was that it was attended by Indian Prime Minister Modi. In the past, because of its uneasy relations with China, India has rarely attended SCO meetings. Modi’s presence this time was seen as marking a rapprochement between India and China, demonstrating the growing strength of their relationship. The hefty tariffs the U.S. has imposed on India were the proximate cause for the change in India’s stance.
A second event was a recent conference in the Russian city of Vladivostok, the de facto capital of eastern Russia. The conference brought together numerous companies that operate in that region. Its purpose was to create business opportunities and foster increased trade among the attendees. Notably, a major topic was the development of a new shipping passage across the Arctic Ocean, near the North Pole. This recently proposed waterway would provide Russia with a vital route for transporting goods across the Global South, significantly reducing shipping distances and connecting countries in a more tactical way. Russia outlined its vision for this oceanic corridor, whose potential impact has been compared to that of the Panama Canal. Linking the Atlantic and Pacific Oceans would be a groundbreaking shift in global trade and travel – and mark a new age in geopolitics. It’s a clear signal of Russia’s determination to expand progress and cooperation, strengthen trade networks, and utilize and develop its unmatched resources regardless of U.S. actions or resistance.
At the conference, Anton Kobyakov, a senior and trusted advisor to President Putin, along with other key advisors, outlined a vision for Russia’s future. They suggested that in the emerging global order, Russia along with China and now India as well will play a central and defining role in the further development of the Global South. The Global South can be loosely defined by three major overlapping groupings: BRICS, the SCO, and the BRI (Belt and Road Initiative). Together these groupings represent over 80% of the world’s population.
Massive Infrastructure Spending: Will It Drive Gold Prices Higher?
Russia’s future—indeed, the entire world’s future—can’t be disentangled from the future of the Global South. And foundational to this future is infrastructure. McKinsey estimates that over the next 15 years, the world will need to spend more than $100 trillion on infrastructure to sustain economic growth, with the proposed Arctic passage just one small component. Beyond sustaining economic growth, infrastructure is also critical to creating the renewable economies that are essential to ensuring mankind’s long-term survival.
Such a massive level of spending would be severely hampered by the lack of an adequate worldwide trading platform. In recent history, two periods stand out for rapid and sustainable worldwide growth: 1870-2015 and 1946-1971. What did these periods have in common, besides unprecedented growth? They were the only times in world history when a gold-centered monetary system was the basis for most worldwide trade. In previous blogs, we’ve discussed gold’s special, almost spiritual, qualities that enable it to underpin an economy motivated less by crass short-term self-defeating materialism and more by a long-term outlook that encourages creativity and community. The two past periods that featured a gold-centered monetary system are consistent with this understanding of gold’s role.
Today, led by China and Russia, the Global South is making rapid progress in transitioning to a gold-centered monetary system. For example, almost all trade between Russia and China, which not too long ago was dollar-based, is now conducted using the gold-backed yuan and ruble. In addition, institutions comparable to the IMF and World Bank have been created. These include the BRICS Bank, the New Development Bank, and the Contingent Reserve Arrangement.
Vaults to hold large amounts of gold are being built or already are in place in key locations such as Hong Kong and Saudi Arabia. The technology for effecting gold-backed trading has been tested. While the exact backing of the digital token that will be used in trading has not yet been specified, we’d guess it will be along the lines of 40% backed by gold bullion, with the remaining 60% consisting of various gold-backed currencies and other commodities, almost certainly including silver.
A big question is what role the U.S. will choose to play in a new world system. If the U.S. isolates itself, continuing to insist that the dollar will forever be the only reserve currency, the impact on us could be catastrophic. Among other things, we depend heavily on other countries, including many in the Global South, for critical resources. Losing access to these would severely constrain our ability to produce everything from automobiles to military equipment to semiconductors.
To create a place for ourselves in the new world order, though, we would need to convince the world that we are a trustworthy trading partner. That starts with getting our enormous government debt, roughly $37 trillion, under control. To do so, we’ll need to back the debt with gold, or dramatically reduce it, or effect some combination of both.
Subject to a forthcoming audit, the U.S. is presumed to have about 8,100 tonnes of gold, equivalent to 261.5 million troy ounces. For historical reasons, these reserves are valued at roughly $42 per ounce, or in total at about $110 billion, just a fraction of 1% of our government debt. If the gold holdings were revalued at the metal’s current price, our reserves would be valued at nearly $1 trillion, or about 2.5% of government debt. This compares with less than 20% in the 1970s and 40% in the 1940s. To return to the level of debt backing of the 1970s would require a gold price close to $30,000 an ounce. To get to the level of the 1940s, gold would need to be valued at around $60,000 an ounce. Are such levels reasonable? If not, where could gold land? Our next blog provides some answers.
Click here to view PART 2 of this blog series… Geopolitics and the Future of Gold: Could It Reach $30,000 an Ounce?
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